When Does the Mortgage Insurance Go Away?

Mortgage insurance serves as a safeguard for lenders when borrowers make a down payment of less than 20% of the home’s purchase price. It protects lenders against losses if a borrower defaults. For many homebuyers, mortgage insurance makes homeownership more accessible by allowing them to purchase a property with a smaller initial investment.

While mortgage insurance provides this important function, it is not always a permanent fixture of a mortgage payment. Under specific conditions, and depending on the type of loan and insurance, mortgage insurance can be removed.

Understanding Mortgage Insurance Types

Mortgage insurance comes in different forms, primarily depending on the type of home loan obtained. The two most common types encountered by homeowners are Private Mortgage Insurance (PMI) and Mortgage Insurance Premium (MIP).

Private Mortgage Insurance (PMI) is associated with conventional loans, which are not insured or guaranteed by a government agency. This insurance is typically provided by private companies. Borrowers usually pay PMI as a monthly premium included in their regular mortgage payment. PMI is a common requirement when a borrower puts down less than 20% of the home’s purchase price.

Mortgage Insurance Premium (MIP) is specific to loans insured by the Federal Housing Administration (FHA). FHA loans are designed to make homeownership more attainable, particularly for first-time buyers or those with lower credit scores. MIP consists of two parts: an upfront mortgage insurance premium (UFMIP) paid at closing, and an annual mortgage insurance premium (annual MIP) paid monthly. The amount of MIP depends on the loan amount, loan term, and the loan-to-value (LTV) ratio.

The rules for when PMI and MIP can be removed differ significantly. PMI has clear federal guidelines for cancellation, offering pathways for borrowers to eliminate this cost. Conversely, MIP, particularly for FHA loans originated more recently, may be required for the entire life of the loan, regardless of the borrower’s equity.

Automatic Termination of Mortgage Insurance

For conventional loans, Private Mortgage Insurance (PMI) can be automatically terminated under specific federal regulations. The Homeowners Protection Act of 1998 (HPA) mandates that lenders automatically cancel PMI for most conventional loans once certain equity thresholds are met.

Automatic termination typically occurs when the loan-to-value (LTV) ratio reaches 78% of the original value of the home. The original value is usually defined as the lesser of the sales price or the appraised value at the time the loan was originated. For example, if a home was purchased for $300,000, PMI would automatically terminate when the loan balance drops to $234,000, which is 78% of the original value.

Another scenario for automatic termination under the HPA is when the mortgage loan reaches the midpoint of its amortization period. This applies even if the 78% LTV threshold has not yet been met. For instance, on a 30-year mortgage, PMI would automatically terminate after 15 years, regardless of the remaining loan balance.

Lenders are required to inform borrowers annually about their right to cancel PMI and when their PMI is scheduled to terminate. Once conditions are met, the loan servicer must stop collecting PMI payments on the next due date. Borrowers must be current on their mortgage payments for automatic termination to occur.

Requesting Mortgage Insurance Cancellation

Homeowners with Private Mortgage Insurance (PMI) on conventional loans can often request its cancellation before the automatic termination date. This borrower-initiated cancellation is typically possible once the loan-to-value (LTV) ratio reaches 80% of the home’s current value. To qualify, borrowers generally need a good payment history, meaning no recent late payments.

The process for requesting PMI cancellation involves contacting the loan servicer directly. The servicer will then outline their specific requirements, which often include a new appraisal of the property. This appraisal helps determine the current market value of the home, confirming the LTV ratio has reached the required 80%. The cost of this appraisal, typically ranging from $400 to $600, is usually the responsibility of the homeowner.

In addition to the LTV requirement and good payment history, lenders may also require that there are no junior liens on the property, such as a second mortgage or home equity line of credit. If all conditions are met and the appraisal confirms the necessary equity, the servicer will remove the PMI from the monthly mortgage payment.

For loans insured by the Federal Housing Administration (FHA), the rules for Mortgage Insurance Premium (MIP) removal are distinct and depend heavily on the loan’s origination date and initial LTV. For FHA loans originated on or after June 3, 2013, with an original LTV greater than 90%, the annual MIP is required for the entire life of the loan.

However, for FHA loans originated on or after June 3, 2013, with an original LTV of 90% or less, the annual MIP can be removed after 11 years. For FHA loans originated before June 3, 2013, the MIP rules vary, but generally, it could be cancelled once the LTV reached 78% or after a certain period, typically five years. Homeowners with FHA loans should review their loan documents or contact their servicer to understand the specific MIP cancellation policy applicable to their loan.