When Do You Pay PMI and When Can You Stop?

Private Mortgage Insurance (PMI) is a type of insurance homeowners may encounter, particularly when securing a conventional home loan. This insurance protects the lender if a borrower defaults on their mortgage payments. It becomes a requirement when the down payment made on a home is less than 20% of the property’s purchase price. PMI effectively reduces the financial risk for lenders, which in turn allows more individuals to qualify for a home loan with a smaller upfront investment.

When PMI Payments Start

PMI payments start when a conventional loan’s loan-to-value (LTV) ratio surpasses 80%. This scenario arises when the borrower’s down payment is less than 20% of the home’s purchase price or its appraised value. For instance, if a home is purchased for $300,000, a down payment of less than $60,000 would trigger the PMI requirement. Lenders perceive a lower down payment as an increased risk, and PMI serves as a financial safeguard against potential losses should the borrower default. The cost of this insurance, known as a premium, is incorporated into the borrower’s regular monthly mortgage payment. This premium is detailed on the Loan Estimate and Closing Disclosure documents provided to the borrower.

Automatic PMI Removal

The Homeowners Protection Act (HPA) of 1998 establishes guidelines for the automatic termination of PMI on conventional loans. A lender is required to automatically cancel PMI once the loan balance is scheduled to reach 78% of the property’s original value, a threshold determined by the initial amortization schedule regardless of the actual outstanding balance. For this automatic termination to take effect, the borrower must be current on their mortgage payments. If PMI has not been canceled earlier through other means, the loan servicer must terminate it by the first day of the month following the midpoint of the loan’s amortization period, provided the borrower is current on payments. Lenders are also obligated to provide borrowers with initial disclosures outlining these automatic termination rights.

Requesting PMI Cancellation

Homeowners can request the cancellation of PMI once their loan-to-value (LTV) ratio reaches 80% of the property’s original value. This process involves submitting a written request to the loan servicer. Maintaining a strong payment history is important for a successful cancellation request. This means the borrower should not have any payments that were 30 days or more past due in the last 12 months, nor any payments 60 days or more past due in the last 24 months. The lender may require a new appraisal, at the homeowner’s expense, to verify the current market value and confirm that the 80% LTV threshold has been met. The cost for such an appraisal can range from $300 to $750. The property should also be free of other liens, such as second mortgages or home equity lines of credit.

Eliminating PMI Through Refinance

Refinancing offers a pathway to eliminate PMI by replacing the existing mortgage with a new one. If the homeowner has accumulated at least 20% equity in their home based on its current appraised value, the new loan can be originated without the PMI requirement. Significant appreciation in property values can help a homeowner reach this 20% equity threshold sooner, making refinancing an option for PMI removal. While refinancing involves closing costs for the new loan, it can also present opportunities for a lower interest rate, a shorter loan term, or access to accumulated home equity. For mortgages that included lender-paid PMI, where the initial PMI cost was absorbed by the lender in exchange for a slightly higher interest rate, refinancing is often the only method to remove this embedded cost.