When Can You Stop Paying PMI on Your Mortgage?

Private Mortgage Insurance (PMI) is insurance required when a homebuyer secures a conventional mortgage with a down payment less than 20% of the home’s purchase price. This insurance protects the lender, not the borrower, against losses if the borrower defaults on the loan. While PMI adds to the monthly mortgage payment, it is not a permanent expense and can eventually be removed, offering financial relief to homeowners.

Automatic PMI Removal

The Homeowners Protection Act (HPA) of 1998 governs the automatic termination of Private Mortgage Insurance for most conventional loans. Under this federal law, lenders must automatically cancel PMI when the loan’s principal balance is scheduled to reach 78% of the home’s original value. This original value is the lesser of the sales price or the appraised value at the time the loan was consummated. For automatic termination, the borrower must be current on their mortgage payments.

PMI can also terminate automatically at the midpoint of the loan’s amortization period, even if the 78% loan-to-value (LTV) threshold has not yet been met. This applies if the 78% LTV is not reached sooner. The lender must notify the borrower when PMI has been canceled or terminated within 30 days of the event. They must also provide annual disclosures detailing the borrower’s rights regarding PMI cancellation and termination.

Requesting PMI Cancellation

Homeowners can proactively request the cancellation of PMI before it would automatically terminate, often leading to earlier savings. This borrower-initiated cancellation is possible when the mortgage balance reaches 80% of the home’s original value. To initiate this process, the homeowner must submit a written request to their mortgage servicer.

The borrower needs a good payment history, meaning no payments 30 days late in the past 12 months and no 60-day late payments in the past 24 months. The loan must also be current, and there should be no subordinate liens on the property. An appraisal may be required, especially if the request is based on increased property value. This is typically at the borrower’s expense.

PMI for Specific Loan Types

While Private Mortgage Insurance (PMI) is associated with conventional loans, other mortgage types have different forms of mortgage insurance. Federal Housing Administration (FHA) loans, for instance, require Mortgage Insurance Premium (MIP). MIP involves both an upfront premium and annual premiums paid monthly.

The removal conditions for FHA MIP depend on the loan’s origination date and the initial down payment. For FHA loans originated after June 3, 2013, MIP is paid for the life of the loan if the down payment was less than 10%. If the down payment was 10% or more, MIP may be removed after 11 years. VA loans, backed by the U.S. Department of Veterans Affairs, do not require PMI or MIP because the VA guarantees a portion of the loan. Instead, VA loans include a one-time VA funding fee, which can often be rolled into the loan and may be waived for certain veterans.

Eliminating PMI Through Refinancing

Refinancing offers another avenue to eliminate Private Mortgage Insurance, distinct from automatic or borrower-initiated cancellation on the existing loan. This strategy involves taking out a new mortgage to pay off the current one, ideally when the home’s value or loan balance allows for PMI removal. If the new loan’s loan-to-value (LTV) ratio, based on a current appraisal, is 80% or less, PMI will not be required on the refinanced loan. This can be advantageous if property values have appreciated significantly since the original purchase, increasing the homeowner’s equity.

Refinancing entails closing costs, which may include appraisal fees, origination fees, and title services. These costs should be weighed against the potential savings from eliminating PMI and any benefits from a lower interest rate or shorter loan term. It is important to calculate the break-even point to determine if the savings from PMI removal and other potential benefits outweigh the upfront refinancing expenses.