When Does Private Mortgage Insurance End?

Private Mortgage Insurance (PMI) is a financial product designed to protect mortgage lenders, not the borrower. It becomes a part of a conventional loan when a borrower makes a down payment of less than 20% of the home’s purchase price. This insurance reduces the lender’s risk in case the borrower defaults on the loan, especially when the equity in the property is low. While PMI safeguards the lender, the cost of these premiums is typically borne by the borrower, often included in their monthly mortgage payment.

Automatic Termination Criteria

The Homeowners Protection Act (HPA) sets specific conditions for automatic PMI termination on conventional loans. One condition for automatic termination occurs when the loan’s principal balance is scheduled to reach 78% of the property’s original value. This original value is defined as the lesser of the sales price or the appraised value at the time the loan was consummated. The termination is based on the original amortization schedule, meaning it is predetermined even if the borrower makes extra payments.

Another scenario for automatic termination is at the midpoint of the loan’s amortization period. For instance, on a 30-year mortgage, PMI terminates after 15 years, regardless of the loan-to-value (LTV) ratio at that time. This provision ensures that PMI eventually ceases, even if the 78% LTV threshold has not been met through scheduled payments.

For automatic termination to occur, the borrower must be current on their mortgage payments. The lender is legally obligated to cease collecting PMI premiums once these conditions are met, even without a request from the borrower.

Borrower-Initiated Cancellation Process

Homeowners can request PMI cancellation before it automatically terminates. This borrower-initiated cancellation is possible once the loan balance reaches 80% of the property’s current value. Unlike automatic termination, which relies on the original property value, borrower-initiated cancellation considers any increase in the home’s market value.

To demonstrate sufficient equity, lenders often require a new appraisal of the property, the cost of which is usually paid by the borrower. This appraisal helps confirm that the property’s value has not declined below its original value. Additionally, the borrower must have a good payment history, typically meaning no 30-day late payments in the last 12 months or no 60-day late payments in the last 24 months.

Lenders may also require that no subordinate liens, such as a second mortgage or home equity line of credit, exist on the property. These additional liens could reduce the lender’s equity protection. Borrowers initiating cancellation must submit a written request to their loan servicer, who will then review the request and verify that all conditions have been met.

PMI Considerations for Different Loan Types

PMI rules primarily apply to conventional loans. For these conventional mortgages, the cancellation and automatic termination provisions established by the HPA dictate when PMI can be removed.

Conversely, government-backed loans, such as those from the Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA), have distinct insurance requirements. FHA loans, for instance, utilize a Mortgage Insurance Premium (MIP) instead of PMI. FHA MIP includes both an upfront premium, typically paid at closing, and an annual premium.

The annual MIP often lasts for the entire life of the loan if the borrower made a down payment of less than 10%. However, if the down payment was 10% or more, the FHA annual MIP may terminate after 11 years.

VA loans, designed for eligible service members, veterans, and surviving spouses, do not require PMI or MIP. Instead, VA loans involve a one-time VA funding fee. This fee helps offset the costs of the VA loan program and ensures its sustainability, serving a similar purpose to mortgage insurance in protecting the lender.

The VA funding fee is typically a percentage of the loan amount and can vary based on factors such as the borrower’s military service, whether it’s a first-time or subsequent use of the VA loan benefit, and the down payment amount. While most borrowers pay this fee, certain individuals, such as those receiving VA disability compensation, may be exempt.