When Can You Get Rid of Private Mortgage Insurance?

Private Mortgage Insurance (PMI) is a specific type of insurance policy typically required when a homebuyer obtains a conventional mortgage loan with a down payment of less than 20% of the home’s purchase price. This insurance safeguards the mortgage lender against potential financial loss if the borrower defaults on the loan. While it protects the lender, the cost of PMI is usually passed on to the borrower, often as a monthly premium added to the mortgage payment. Homeowners frequently seek to remove PMI to reduce their overall monthly housing expenses, as it can represent a significant additional cost.

Conditions for PMI Removal

The ability to remove Private Mortgage Insurance is governed by specific criteria, primarily outlined by federal law, including the Homeowners Protection Act (HPA) of 1998, which sets clear guidelines for its cancellation and termination. This legislation applies to borrower-paid PMI on conventional loans secured by single-family primary residences where the loan closed on or after July 29, 1999.

One common path to removing PMI is through a borrower-initiated cancellation. This is generally possible when the mortgage loan balance reaches 80% of the home’s original value. The “original value” refers to the lesser of the property’s purchase price or its appraised value at the time the loan was first taken out.

Beyond reaching the specific loan-to-value (LTV) threshold, lenders require the homeowner to have a satisfactory payment history. This usually means no payments that were 30 days or more past due in the preceding 12 months, and no payments that were 60 days or more past due within the last 24 months. Additionally, there should be no subordinate liens, such as a second mortgage or home equity line of credit, on the property.

The Homeowners Protection Act also mandates automatic termination of PMI under certain circumstances. A lender is required to automatically cancel PMI when the mortgage loan balance is scheduled to reach 78% of the original value of the home. This calculation is based on the original amortization schedule of the loan, regardless of any extra payments made.

Another form of automatic termination, known as final termination, requires PMI to be terminated by the midpoint of the loan’s amortization period. For example, on a standard 30-year mortgage, this would occur after 15 years, provided the borrower remains current on their payments.

If property values in an area have appreciated significantly, or if a homeowner has made substantial improvements to their home, a new appraisal can be instrumental in demonstrating eligibility for PMI removal. The increased market value or enhanced property value can help the homeowner reach the 80% LTV threshold sooner than by simply paying down the principal balance.

It is important to differentiate between Private Mortgage Insurance (PMI) for conventional loans and Mortgage Insurance Premium (MIP) for Federal Housing Administration (FHA) loans, as the rules for removal vary considerably. Unlike PMI, MIP for FHA loans often has more stringent and sometimes permanent requirements. For FHA loans originated on or after June 3, 2013, MIP is generally permanent for the life of the loan unless the borrower made an initial down payment of 10% or more, in which case it may cancel after 11 years.

For FHA loans closed before June 3, 2013, MIP may be eligible for cancellation once the loan-to-value ratio reaches 78% for 15-year terms, or after five years and reaching 78% LTV for 30-year terms. Due to these differences, many FHA loan holders seeking to eliminate MIP choose to refinance their FHA loan into a conventional loan once they have sufficient equity.

Steps to Remove PMI

The first and most important action is to contact the mortgage loan servicer directly. This initial contact is essential to understand the specific requirements and procedures of the particular servicer, as these can vary.

Upon contact, the servicer may provide a formal “PMI Removal Application” or outline the necessary information to submit a written request. Homeowners should be prepared to provide their loan number and clearly state the basis for their removal request, whether it is due to reaching the 80% LTV threshold through payments or significant property appreciation. It is also important to affirm a good payment history and confirm the absence of any subordinate liens on the property.

If the request is based on an increase in the home’s value, a new appraisal report will likely be necessary. Homeowners should avoid ordering their own appraisal unless specifically instructed by the servicer, as the servicer may require one conducted by their approved appraiser. Any costs associated with this valuation, which can range from approximately $300 to $750, are generally the homeowner’s responsibility.

After the request and any required documentation, such as an appraisal or evidence of home improvements, are submitted, the loan servicer will review the information. During this review, the servicer might initiate their own property inspection or order an independent appraisal to verify the home’s value. The timeline for this review and decision can vary, but the servicer is obligated to notify the borrower of their decision. If PMI is successfully canceled, any unearned premiums must be returned to the borrower within 45 days.