When Can You Drop PMI Insurance From Your Mortgage?

Private Mortgage Insurance (PMI) is insurance required for conventional mortgage loans when a homebuyer makes a down payment of less than 20% of the home’s purchase price. This insurance serves to protect the lender, not the borrower, against financial loss if the borrower defaults on the mortgage. PMI allows individuals to qualify for a mortgage with a smaller upfront investment, making homeownership more accessible. While it adds to the monthly mortgage payment, it is not a permanent expense.

Automatic PMI Termination

Federal law, the Homeowners Protection Act (HPA), mandates the automatic termination of Private Mortgage Insurance under certain conditions. This law applies to conventional mortgages on single-family primary residences that closed on or after July 29, 1999. Lenders must cancel PMI once the principal balance of the mortgage reaches 78% of the home’s original value. This termination occurs automatically if the borrower is current on payments.

The original value of the home is the lesser of the contract sales price or the appraised value at the time of purchase. If the loan was a refinance, the original value is the appraised value at the time of refinancing. This 78% loan-to-value (LTV) ratio is calculated based on the initial amortization schedule of the loan, anticipating when the principal balance will reach this threshold through regular payments.

The HPA also mandates termination: PMI must be terminated the month after the midpoint of the loan’s amortization schedule is reached. This applies even if the 78% LTV threshold has not yet been met, if the borrower is current on payments. For a 30-year mortgage, this midpoint typically occurs after 15 years. This offers an alternative path to PMI removal.

Borrower-Initiated PMI Cancellation

Homeowners can also request PMI cancellation before it automatically terminates. This borrower-initiated cancellation is typically possible once the mortgage loan’s principal balance reaches 80% of the home’s original value.

To qualify for borrower-initiated cancellation, a good payment history is required. This means no payments 30 days or more late in the past 12 months, and no payments 60 days or more late in the preceding 24 months. Lenders also typically require that there are no junior liens on the property, such as a second mortgage or home equity line of credit.

If a homeowner believes their property has appreciated in value or they have made significant improvements, they can request PMI cancellation based on the current market value. The lender may then require a new appraisal to confirm the home’s current value. This strategy allows borrowers to reach the 80% LTV threshold sooner than scheduled, potentially saving them money on PMI premiums.

The PMI Removal Process

Once a homeowner determines they meet the criteria for PMI cancellation, initiating the removal process involves several direct steps with the mortgage servicer. The first action is to contact the servicer, which can often be done by phone, to confirm their specific requirements for PMI removal. It is generally advisable to follow up this initial contact with a formal written request for cancellation. This written request should clearly state the desire to cancel PMI and reference the loan number.

The servicer will then review the loan’s payment history to ensure all payments are current and that the borrower meets the established good payment history criteria. They will also verify that no other liens exist on the property that could complicate the removal. If the request for cancellation is based on an increase in the home’s value, the servicer will typically require an updated appraisal. This appraisal is usually ordered by the servicer, and the cost, which can range from $300 to $600, is typically borne by the homeowner.

Upon receipt of the appraisal and verification of all other conditions, the servicer will make a decision regarding the PMI cancellation. If approved, the homeowner will be notified, and the PMI charges will cease. The adjustment will typically be reflected in the next monthly mortgage statement. Understanding these procedural steps ensures a smooth and efficient process for removing PMI once the eligibility requirements have been satisfied.