How to Cancel Private Mortgage Insurance When Your Home Equity Grows

If you bought your home with a down payment of less than 20 percent, your lender probably required you to pay for private mortgage insurance, or PMI. This insurance protects the lender if you stop making payments, but it does nothing for you. The good news is that PMI is not forever. Once you build enough equity in your home, you have the right to get rid of it. Understanding when and how to cancel PMI can save you hundreds of dollars each month.

First, let’s talk about what equity means. Equity is the part of your home that you actually own. It’s the current market value of your house minus the amount you still owe on your mortgage. For example, if your home is worth $300,000 and you owe $240,000, you have $60,000 in equity, which is 20 percent of the value. Once your equity reaches 20 percent, your lender is no longer at risk of losing money if you default, because they could sell the house and recover their loan. That is why PMI is no longer needed.

There are two main ways to cancel PMI. The first is automatic cancellation. By law, your lender must automatically drop your PMI once your mortgage balance falls to 78 percent of the original purchase price of your home. This rule applies to most conventional loans made after July 1999. But careful: this automatic trigger is based on the original value of the home, not the current value. If your home has gone up in price, you might reach 20 percent equity sooner than the 78 percent mark. That brings us to the second way: you can request cancellation yourself.

You can ask your lender to cancel PMI once you have paid down your loan to 80 percent of the original home value. But to do this, you usually need to meet a few conditions. Your payments must be current, meaning you have not missed any mortgage payments. You also need to show that you have a good payment history. And you might need to provide proof that your home has not dropped in value. Some lenders will ask for a property appraisal, which you pay for, to confirm the current market value is high enough. If your home value has increased since you bought it, you might reach 20 percent equity even faster. In that case, you can request cancellation based on the current value instead of the original purchase price. This is called a “low appraisal” or “value-based” cancellation, and it can save you thousands of dollars if your home has appreciated.

What if your home value has gone down? Then you might not be able to cancel PMI through a request, because you may owe more than the house is worth. In that situation, you will have to wait until you pay down the loan enough to reach that 78 percent mark, unless you can make extra payments to build equity faster. Many homeowners choose to make extra principal payments each month or make a lump sum payment to push their loan balance below 80 percent of the original value. That is a smart way to speed up the process.

It is important to know your rights. Your lender is required to send you a notice each year about your PMI. They must tell you when you have the right to cancel and explain how to do it. If you think you have hit the 20 percent equity threshold, do not wait for them to reach out. Contact your lender directly, ask for the PMI cancellation request form, and provide any documents they ask for. The process can take a few weeks, so be patient. Once your request is approved, the PMI premium will stop appearing on your next mortgage statement.

Some homeowners worry that canceling PMI will hurt their credit. It will not. PMI has nothing to do with your credit score. It is simply an extra cost attached to your loan. Removing it will lower your monthly payment and free up money you can use elsewhere.

There is one more thing to watch out for. Some loans have PMI that cannot be canceled. These are typically government-backed loans like FHA loans, which have their own mortgage insurance premium rules. Private mortgage insurance on conventional loans, however, can almost always be canceled. If you are not sure what kind of loan you have, check your original paperwork or ask your lender. If you have a conventional loan and your equity is high enough, you have the right to drop PMI.

In short, PMI is a temporary expense that goes away once you own at least 20 percent of your home. Keep an eye on your loan balance and your home’s value. When you think you have enough equity, take action. A few phone calls and a simple request can put hundreds of dollars back in your pocket every year. Do not let PMI linger longer than it has to. Use your home equity to your advantage and cancel it as soon as you can.