When Can You Have PMI Removed From Your Mortgage?

Private Mortgage Insurance (PMI) is a type of mortgage insurance required for conventional home loans when the borrower makes a down payment of less than 20% of the home’s purchase price. Its purpose is to protect the lender, not the homeowner, against potential losses if the borrower defaults on the mortgage. While PMI allows individuals to purchase a home with a lower initial investment, it adds to the monthly mortgage payment. Understanding the circumstances and processes for its removal can lead to savings for homeowners.

Automatic Termination of PMI

The Homeowners Protection Act of 1998 (HPA) provides federal guidelines for the automatic termination of Private Mortgage Insurance. Under this act, a lender is required to automatically terminate PMI when the principal balance of the mortgage is scheduled to reach 78% of the home’s original value. This termination is based on the original amortization schedule of the loan.

A good payment history is a prerequisite for automatic termination. This means no 30-day late payments in the last 12 months and no 60-day late payments in the last 24 months. The HPA also mandates that PMI must terminate at the midpoint of the loan’s amortization period, even if the 78% loan-to-value (LTV) ratio has not been met, provided the borrower is current on payments. For a 30-year loan, this midpoint is after 15 years.

Borrower-Initiated PMI Cancellation

Homeowners can request the cancellation of PMI sooner than the automatic termination date. This is possible when the mortgage loan balance reaches 80% of the home’s original value. The “original value” refers to the lesser of the contract sales price or the appraised value at the time the loan was originated. If the property has been refinanced, the original value is the appraised value at the time of refinancing.

To qualify for borrower-initiated cancellation, the homeowner must have a history of consistent, on-time payments, as defined for automatic termination. Additionally, the property should not have any junior liens, such as a second mortgage or a home equity line of credit. Some lenders may also impose a seasoning requirement, such as two years, before a cancellation request can be made.

Requesting PMI Removal

Initiating the PMI removal process involves direct communication with the mortgage servicer. Homeowners should contact their servicer to inquire about specific PMI cancellation guidelines and request the necessary forms or procedures. The servicer will require a formal written request for cancellation.

As part of the process, the servicer will require an updated appraisal of the property to confirm its current market value. This appraisal helps verify that the loan-to-value ratio meets the cancellation criteria, especially if property appreciation is a factor in achieving the required equity. The cost of this appraisal is usually the responsibility of the homeowner. The servicer will arrange for their own approved appraiser, so homeowners should not order an independent appraisal. Once all documentation is submitted, the servicer will review the request and notify the homeowner of their decision.

PMI on FHA Loans

Mortgage insurance for FHA (Federal Housing Administration) loans differs from conventional PMI. FHA loans require Mortgage Insurance Premium (MIP), which includes both an Upfront Mortgage Insurance Premium (UFMIP) and an Annual Mortgage Insurance Premium (Annual MIP). The UFMIP is a one-time fee, currently 1.75% of the loan amount, which can be paid at closing or financed into the loan.

The duration of the Annual MIP depends on the loan’s origination date and the initial loan-to-value (LTV) ratio. For FHA loans originated after June 3, 2013, Annual MIP is required for the entire loan term if the original down payment was less than 10%. If the original down payment was 10% or more, the Annual MIP may be canceled after 11 years. Unlike conventional PMI, FHA MIP cannot be removed simply by reaching a certain equity percentage; refinancing into a conventional loan is the method to eliminate it for loans originated after this date.