PMI Costs: Exactly When and How Can You Remove It?

Private Mortgage Insurance (PMI) enables millions of buyers to purchase homes without a 20% down payment, but it’s an added monthly cost that protects the lender, not you. Fortunately, for conventional loans, PMI is not a permanent sentence. With a smart strategy, you can get rid of it early and save thousands over the life of your mortgage.

The Homeowners Protection Act Rules

The rules for PMI removal on conventional loans are federally regulated by the Homeowners Protection Act (HPA) of 1998. This law gives homeowners two primary milestones based on the Loan-to-Value (LTV) ratio of the original property value.

1. Requesting Cancellation at 80% LTV

For many mortgages covered by the Homeowners Protection Act, you may request PMI cancellation when the principal balance is scheduled to reach, or actually reaches, 80% of the home's original value, subject to the Act's eligibility conditions.

• You must initiate this: It will not happen automatically. You have to contact your loan servicer in writing.
• Good payment history required: Most lenders will deny the request if you have been 30 days late on a payment within the past year or 60 days late within the past two years.
• No second liens: Generally, you cannot have subordinate financing, such as a home equity loan, that takes your combined LTV above 80%.
• Current value verification: Lenders may require you to pay for a Broker Price Opinion (BPO) or an appraisal to verify the home's value hasn't dropped since purchase.

2. Automatic Cancellation at 78% LTV

If you don't take action, the HPA generally requires automatic PMI termination on the date the principal balance is scheduled to reach 78% of the original value, provided the loan is covered by the rule and the borrower is current.

The key word here is "scheduled." The automatic drop-off is based on your initial amortization schedule, regardless of extra payments you've made. If you want it removed sooner based on extra principal payments, you must proactively request cancellation (using the 80% LTV rule).

Using a New BPO or Appraisal to Prove Value Appreciation

What if you haven't paid your loan balance down to 80%, but housing prices in your area have skyrocketed? Can you use your home's new, higher value to calculate a new LTV and get rid of PMI?

Current-value PMI cancellation depends on the investor and servicer rules that apply to your loan. For example, Fannie Mae's current servicing guide generally uses the following thresholds for a one-unit principal residence or second home:

• Two to five years of seasoning: current-value LTV generally must be 75% or less.
• More than five years of seasoning: current-value LTV generally must be 80% or less.
• Qualifying substantial improvements: Fannie Mae may waive the minimum two-year seasoning requirement when borrower-made improvements increased the property's value; other eligibility conditions still apply.

To use a current-value method, contact your servicer first. The servicer or investor may require an approved valuation method, and the borrower may be responsible for the valuation cost.

Distinguish Between Conventional and FHA Rules

The conventional PMI rules above do not govern FHA mortgage insurance. FHA annual MIP follows a separate HUD schedule based on factors including the original LTV, loan term, base loan amount, and case-assignment date.

The Bottom Line

Track your loan balance and review the PMI disclosure you received at closing. If you think you qualify for borrower-requested cancellation based on original value or an investor's current-value rules, contact your servicer to confirm the applicable requirements before ordering a valuation or making a decision.