When Does Private Mortgage Insurance Stop?
Understand when and how Private Mortgage Insurance (PMI) can be removed from your mortgage, saving you money.
Private Mortgage Insurance (PMI) is a financial safeguard for lenders, protecting them if a borrower defaults. Lenders typically require PMI when a homebuyer makes a down payment of less than 20% of the home’s purchase price. While PMI adds to the monthly mortgage payment, it allows individuals to purchase a home sooner than if they needed a larger down payment. PMI is not a permanent obligation and can be eliminated.
Automatic PMI Termination Criteria
The Homeowners Protection Act (HPA) of 1998 provides guidelines for automatic PMI termination on most conventional loans. Under this federal law, a mortgage servicer must automatically cancel PMI on the date when the principal balance of the mortgage is scheduled to reach 78% of the property’s original value, based on the initial amortization schedule. This occurs if the borrower is current on payments.
The HPA also stipulates that PMI must terminate at the midpoint of the loan’s amortization period, even if the 78% loan-to-value (LTV) ratio has not yet been reached. For a 30-year mortgage, this would typically be after 15 years. This provision mainly benefits borrowers with certain loan structures, such as those with interest-only periods or balloon payments. These federal requirements apply to mortgages on single-family primary residences closed on or after July 29, 1999.
These rules primarily apply to conventional loans and differ from the Mortgage Insurance Premium (MIP) associated with Federal Housing Administration (FHA) loans. FHA loans have distinct and often stricter rules regarding MIP cancellation, which in many cases may remain for the entire loan term or for 11 years, depending on the original loan-to-value ratio. Unlike PMI, FHA MIP cannot be removed simply by accumulating equity.
Conditions for Requesting PMI Cancellation
Homeowners can request PMI cancellation sooner than the automatic termination date by meeting conditions set by their loan servicer. A requirement is accumulating sufficient equity, typically reaching 20% equity based on the original purchase price or appraised value at the time of loan origination. If the homeowner believes the home’s value has increased, they might need 20% or 22% equity based on the current market value, often necessitating a new appraisal.
A consistent payment history is also necessary for a successful cancellation request. Most servicers require no 30-day late payments in the last 12 months and no 60-day late payments in the past 24 months. Additionally, some lenders may require a minimum period to have passed since the loan was originated, such as two years, especially if the request is based on increased property value rather than principal reduction.
To confirm the current market value of the home, the lender will likely require a new appraisal, the cost of which is typically borne by the homeowner. Furthermore, the property should not have any subordinate liens, such as a second mortgage or a home equity line of credit (HELOC), as these introduce additional risk for the primary lender.
The Process for Requesting PMI Removal
Once conditions for PMI cancellation are met, initiate the removal process by contacting the mortgage servicer. Contact the servicer to inquire about their specific PMI cancellation policies and requirements. Servicers may have their own procedures in addition to federal guidelines.
A formal written request for PMI cancellation is typically required to begin the process. A clear written letter stating the request is usually sufficient. If an appraisal is necessary to verify current home value, the servicer will arrange for it, and the homeowner will be responsible for the appraisal fee.
The homeowner may also need to provide additional documentation, such as a certification that no junior liens exist on the property. Maintaining a flawless payment record is paramount for approval. After all required documentation and the appraisal, if applicable, are submitted, the servicer will review the request. The servicer will then notify the homeowner of their decision. If approved, PMI will be removed from future mortgage statements, reducing the monthly payment.