When Will Private Mortgage Insurance Be Removed?

Private Mortgage Insurance (PMI) is typically required with conventional mortgage loans when a homebuyer makes a down payment of less than 20% of the property’s value. This insurance protects the lender, not the borrower, against potential losses if the borrower defaults on the loan. PMI allows more individuals to achieve homeownership by mitigating the increased risk lenders face with smaller down payments. PMI is not permanent and can be removed under specific conditions.

Automatic PMI Termination

Lenders are legally obligated to automatically terminate Private Mortgage Insurance under certain circumstances, primarily governed by the Homeowners Protection Act (HPA) of 1998. The HPA applies to conventional loans for single-family principal residences originated after July 29, 1999.

Under the HPA, PMI must automatically terminate when the loan-to-value (LTV) ratio reaches 78% of the property’s original appraised value or sales price, whichever amount is less. This termination is based on the original amortization schedule, meaning it is calculated regardless of any extra payments made. The borrower must be current on their mortgage payments for this automatic termination to occur.

Another provision for automatic termination is the “midpoint rule.” If PMI has not already been canceled, it must be terminated on the first day of the month following the midpoint of the loan’s amortization period. For instance, on a 30-year mortgage, this would be after 15 years. This rule applies even if the 78% LTV threshold has not yet been met, provided the borrower is current on their payments.

Borrower-Initiated PMI Cancellation

Homeowners can proactively request Private Mortgage Insurance cancellation earlier than the automatic termination dates. This process typically requires the borrower to demonstrate a loan-to-value (LTV) ratio of 80% of the original appraised value or sales price. The original value refers to the lesser of the home’s initial sales price or its appraised value at the time the mortgage was created.

To initiate this cancellation, borrowers must have a good payment history. This means no payments 30 days or more past due in the preceding 12 months, and no payments 60 days or more past due in the past 24 months. The property needs to be the borrower’s primary residence and free of any subordinate liens, such as a second mortgage or home equity loan.

The process begins by contacting the loan servicer to inquire about their specific requirements and procedures for early PMI cancellation. Servicers may require a new appraisal to determine the current property value, especially if property values have appreciated. This appraisal cost is usually borne by the homeowner. The servicer will review the request and notify the borrower of their decision after evaluating the LTV, payment history, and any other conditions.

Special Considerations for FHA Loans

Federal Housing Administration (FHA) loans operate with a different form of mortgage insurance known as Mortgage Insurance Premiums (MIP), which has distinct rules compared to conventional PMI. FHA loans require both an Up-Front Mortgage Insurance Premium (UFMIP), usually paid at closing, and an Annual Mortgage Insurance Premium (Annual MIP), which is paid monthly. FHA MIP is required regardless of the down payment amount.

The rules for Annual MIP removal depend significantly on the loan’s origination date and the original loan-to-value (LTV) ratio. For FHA loans originated on or after June 3, 2013, if the original down payment was 10% or more, the Annual MIP can be removed after 11 years. However, if the original down payment was less than 10%, the Annual MIP is generally required for the entire life of the loan.

For FHA loans originated before June 3, 2013, MIP could be removed once the LTV ratio reached 78% to 80% of the original value, provided specific payment history criteria were met. Refinancing into a conventional mortgage is often the primary method to eliminate the ongoing Mortgage Insurance Premium for FHA borrowers.