When to Stop Paying Your Private Mortgage Insurance

Private Mortgage Insurance (PMI) protects the mortgage lender if a borrower defaults on their loan. Lenders generally require PMI when a homebuyer makes a down payment of less than 20% of the home’s purchase price. This insurance helps mitigate the increased risk lenders take on with smaller down payments. While PMI adds to the monthly mortgage payment, there are established ways to discontinue paying it.

Automatic PMI Termination

The Homeowners Protection Act (HPA) of 1998 outlines specific conditions under which lenders are legally obligated to terminate private mortgage insurance automatically. For most conventional loans, this automatic termination occurs when the loan-to-value (LTV) ratio reaches 78% of the home’s original value, defined as the lesser of the purchase price or the appraised value at the time the loan was originated. The borrower must be current on their mortgage payments for this automatic termination to take effect.

Another condition for automatic termination under the HPA is reaching the halfway point of the loan’s amortization schedule. For instance, on a 30-year mortgage, PMI must be terminated at the 15-year mark, provided the borrower’s payments are current. Lenders are required to notify borrowers annually about their right to cancellation and the projected date when PMI is expected to terminate.

Homeowner-Initiated PMI Cancellation

Homeowners can proactively request the cancellation of PMI once their loan-to-value (LTV) ratio reaches 80% of the home’s original value. To qualify for homeowner-initiated cancellation, a borrower must maintain a good payment history, typically meaning no payments 30 days or more late in the past 12 months, and no payments 60 days or more late in the past 24 months. The loan must also be current at the time of the cancellation request.

The process typically begins with the homeowner contacting their mortgage servicer to inquire about the specific requirements and necessary documentation. The servicer may require evidence that the property’s value has not declined below its original value, often necessitating a new appraisal at the homeowner’s expense. An appraisal can cost between $300 and $400, but the savings from eliminating PMI can often outweigh this cost. Once all conditions are met, the homeowner must submit a written request to the servicer for PMI cancellation.

Removing PMI Through Refinancing

Refinancing the mortgage presents another avenue for eliminating PMI, particularly if the home’s value has increased significantly since the original purchase. If the loan-to-value (LTV) ratio of this new loan is 80% or less of the home’s current appraised value, PMI is generally not required.

However, refinancing involves closing costs, which can include various fees such as origination fees, appraisal fees, and title insurance. These costs typically range from 2% to 5% of the new loan amount. Homeowners should carefully weigh these expenses against the potential savings from eliminating PMI and any changes in interest rates before deciding to refinance.

PMI for FHA Loans

Mortgage insurance rules for Federal Housing Administration (FHA) loans, known as Mortgage Insurance Premiums (MIP), differ significantly from conventional PMI. FHA loans require both an Upfront Mortgage Insurance Premium (UFMIP), typically paid at closing, and an Annual Mortgage Insurance Premium (Annual MIP), which is paid monthly. Unlike conventional PMI, FHA MIP is required regardless of the down payment amount.

The ability to cancel FHA MIP depends on the loan’s origination date and the initial loan-to-value ratio. For FHA loans originated before June 3, 2013, the Annual MIP can generally be cancelled once the loan-to-value ratio reaches 78% of the original loan amount, provided payments have been made for at least five years for 30-year loans. However, for FHA loans originated on or after June 3, 2013, the rules are more stringent. If the original loan-to-value was 90% or less, the Annual MIP can be cancelled after 11 years. If the original loan-to-value was greater than 90%, the Annual MIP is typically required for the life of the loan, meaning it cannot be cancelled unless the loan is refinanced into a conventional mortgage.