How to Cancel PMI

If you are a current homeowner with a conventional mortgage and put down less than 20% at closing, then you may already be familiar with private mortgage insurance (PMI). This additional fee is likely adding to your monthly payments. The good news is, that there are avenues for removing it from your mortgage altogether.

What is private mortgage insurance?

PMI is a type of mortgage insurance commonly associated with conventional loans. It is applied in cases where a homebuyer provides a down payment that is less than 20%. More often than not, it is paid as a monthly fee that is added to your mortgage payments.

How long does PMI last?

If your current conventional mortgage has PMI, it usually lasts until your loan-to-value (LTV) ratio reaches a certain percent or you have lived in the home for a specific amount of time and allowed the mortgage to age.

For example, depending on your lender, your PMI may be removed automatically once your mortgage has reached a 78% to 80% LTV ratio based on the original amortization schedule. However, some lenders may require you to come in at a 75% LTV before PMI is removed. This provision is made under the terms outlined in the Homeowners Protection Act of 1998 (HPA).

Here is an example:

• $200,000 original property value
• $180,000 beginning mortgage balance (90% LTV)

Over the last several years, you may have reached the date your original amortization projected your loan balance would be 78% of the original value.

• $156,000 projected balance (78% LTV)

At this point, your lender would remove your PMI automatically if you have remained current and timely on all of your payments. However, be advised that you are unable to pay down your loan to reach the 78% LTV for automatic termination; this is solely based on the date provided on the PMI Initial Disclosure in the case of fixed-rate loans. For borrowers who chose ARM loans, you may receive a notice after closing from your mortgage servicer if the initial date and amortization schedule are not known at closing.

Four conditions for PMI Removal

Another way to get your PMI removed is to submit a request if you think your property value has gone up or if you have reached your 80% cancellation date (scheduled or actual). Note that your mortgage servicer is required to provide you with an annual notice about your right to cancel PMI.

However, before you submit your request, make sure you meet the following conditions;

1. You have a conventional mortgage.

You must have a conventional mortgage (not an FHA) to get your mortgage insurance removed. In most cases, FHA's mortgage insurance premiums remain for the life of the loan.

In the case of lender-paid PMI, it is important to note that you will not have automatic termination or borrower-initiated cancellation rights.

2. Your home meets the number of units requirement.

The mortgage must have been used to purchase a one-unit primary residence or second home. That includes a single-family home, condo, townhome, or one side of a duplex.

If you have a one-to-four-unit investment property or a two-to-four-unit that is also used as your principal residence, then you will need to have 30% equity (70% LTV) before it qualifies for PMI removal. However, multi-unit or investment properties purchased with a Freddie Mac loan must have an LTV ratio of 65% in order to qualify.

3. Your loan has aged long enough to meet the cancellation criteria.

The date on which your loan reaches 80% (20% equity) is called the cancellation date. Whether you reach 80% on the originally projected schedule or after, you can submit a cancellation request of PMI to your lender. In order to cancel PMI, you will need to:

• Submit a written request to your lender

• Exhibit a positive payment history (see condition 4 below)

• Be up to date on your current payments

Depending on your mortgage servicer's requirements, you may need to provide evidence that the value of your property has not declined since purchasing it and that there are no subordinate liens on the property's title. If an appraisal and lien search is required, the associated expenses would be paid by the homeowner.

4. You have a satisfactory payment history.

In order to qualify for PMI cancellation, your payment history must meet the following requirements:

• Within the last 12 months, your payment was not 30 or more days past due

• Within the last 24 months, your payment was not 60 or more days past due

Once you submit a request, your lender reviews your mortgage to see if you qualify for having your PMI removed. If you are eligible, most lenders will remove it within 30 days of receiving your property's value.

How does property value affect PMI removal?

We touched on it above, but it is worth outlining exactly how the value of your property factors into your ability to have PMI removed. If your property value is higher it can make it easier to have PMI removed as it increases the equity in your home allowing you to reach the required LTV ratio. The LTV ratio you must meet will typically fall between 75% to 80%, so be sure to reach out to your lender to better understand their requirements.

Remember that the age of your conventional loan is also a condition for mortgage insurance removal. For instance, if you have owned the home for less than two years, but have reached the required LTV ratio for PMI cancellation due to home improvements or upgrades, you will have to submit documentation of those improvements with your removal request. However, if you have a Fannie Mae loan, then you must wait until it is over two years old regardless of any improvements you have invested to increase the home’s value.

If you are interested in removing PMI from your conventional mortgage, be sure to talk with your lender so you better understand all of your options.