When Can You Get Rid of Mortgage Insurance?

Mortgage insurance is a financial safeguard for lenders, typically required when a homeowner makes a down payment of less than 20% on a home purchase. Its primary purpose is to protect the lender from financial loss if the borrower defaults on the mortgage. This insurance is an additional cost for homeowners, paid on top of their regular mortgage payments. For many, understanding how to eliminate this expense is a financial goal. This article explains how homeowners can stop paying for mortgage insurance.

Understanding Mortgage Insurance

Mortgage insurance comes in two primary forms: Private Mortgage Insurance (PMI) for conventional loans and Mortgage Insurance Premium (MIP) for loans backed by the Federal Housing Administration (FHA). PMI is typically arranged by private companies and applies to conventional loans where the borrower’s equity is less than 20% of the home’s value. The cost of PMI can vary, often ranging from 0.3% to 1.5% of the original loan amount annually, paid monthly.

In contrast, FHA loans require MIP, which includes an upfront premium paid at closing or financed into the loan, and an annual premium paid monthly. The rules for removing MIP differ significantly from PMI. For FHA loans originated after June 3, 2013, with a loan-to-value (LTV) ratio of 90% or less (meaning a down payment of 10% or more), MIP can be canceled after 11 years. However, if the LTV ratio is greater than 90% (down payment less than 10%), MIP is generally required for the entire loan term. The loan-to-value (LTV) ratio is calculated by dividing the outstanding loan balance by the home’s value.

Automatic Mortgage Insurance Termination

The Homeowners Protection Act of 1998 (HPA) mandates that lenders automatically cancel Private Mortgage Insurance (PMI) for conventional mortgages when the principal balance is scheduled to reach 78% of the property’s original value. This calculation is based on the original amortization schedule, regardless of any additional payments the borrower might have made.

PMI also automatically terminates under the HPA when the principal balance actually reaches 80% of the property’s original value, even if the 78% scheduled point has not been met. For this termination to occur, the borrower must be current on their payments, meaning no payment was 60 days or more past due in the last 12 months, or 30 days or more past due in the last 24 months. The lender is responsible for tracking these thresholds and initiating termination without borrower action. This helps ensure borrowers are not indefinitely paying for PMI once specific equity milestones are met.

Requesting Mortgage Insurance Cancellation

Borrowers can proactively request PMI cancellation for conventional loans once their loan-to-value (LTV) ratio reaches 80% of the home’s current appraised value. This can occur sooner than automatic termination if the home’s value has increased or extra principal payments have been made. To initiate this process, borrowers must submit a written request to their mortgage servicer. This request prompts the servicer to review the loan’s eligibility.

Several conditions must be met for borrower-initiated cancellation. A good payment history is a common requirement, often meaning no payments more than 30 days late in the past 12 months, and no payments more than 60 days late in the past 24 months. The property should also be free of junior liens, such as a second mortgage or home equity line of credit. Lenders often require a new appraisal to confirm current market value, with the borrower typically bearing the $300 to $600 cost. FHA Mortgage Insurance Premium (MIP) generally cannot be canceled by borrower request in the same manner as PMI.

Refinancing for Mortgage Insurance Removal

Refinancing an existing mortgage offers another way to eliminate mortgage insurance, especially when a homeowner has built sufficient equity. By obtaining a new mortgage, homeowners can avoid PMI or MIP if the new loan-to-value (LTV) ratio is 80% or less based on the property’s current appraised value. This strategy is particularly effective if the home’s market value has appreciated significantly since the original purchase, or if substantial principal payments have been made, allowing the borrower to meet the 80% LTV threshold with the new loan.

While refinancing eliminates mortgage insurance, it involves new closing costs, typically 2% to 5% of the loan amount, including origination, appraisal, and title insurance fees. Homeowners must weigh these upfront costs against the ongoing savings from eliminating monthly mortgage insurance payments to determine if refinancing is a financially sound decision. For FHA loans with permanent MIP, refinancing into a conventional loan with an LTV of 80% or less is often the most viable method to remove the mortgage insurance obligation, allowing borrowers to shed the FHA’s ongoing MIP requirement.