When and How You Can Cancel Your Private Mortgage Insurance (PMI)

If you bought a home with a down payment of less than twenty percent, you were likely required to pay for Private Mortgage Insurance, or PMI. This is an insurance policy that protects the lender, not you, in case you stop making your mortgage payments. You pay for it each month as part of your total mortgage bill. For many homeowners, PMI can feel like an extra tax on top of an already large payment. The good news is that PMI is not a permanent cost. Under federal law, you have the right to cancel it once you meet certain conditions. Understanding how to do this can save you a significant amount of money over the life of your loan.

The most important factor for canceling PMI is how much equity you have in your home. Equity is the difference between what your home is currently worth and what you still owe on your mortgage. To get rid of PMI, you generally need to have at least twenty percent equity in your home. This equity can come from a combination of paying down your mortgage principal over time and any increase in your home’s market value. For example, if you bought a home for two hundred thousand dollars with a ten percent down payment, your initial loan was for one hundred and eighty thousand dollars. If your home’s value has since risen to two hundred and twenty-five thousand dollars, and you have paid the loan down to one hundred and seventy thousand dollars, you now have fifty-five thousand dollars in equity. That is roughly twenty-four percent equity, which puts you over the threshold.

There are two ways cancellation can happen. The first is automatic. The Homeowners Protection Act requires your lender to automatically cancel your PMI once your mortgage balance falls to seventy-eight percent of the original value of your home. This means the lender watches your payments and cuts off the insurance at that point without you having to do anything. However, this automatic cancellation only looks at the original purchase price, not current market value. If home prices have gone up in your area, you might be able to cancel earlier than that automatic date.

That brings us to the second way: you can request cancellation in writing. You can do this once your loan-to-value ratio hits eighty percent. Loan-to-value is just a fancy way of saying how much you owe compared to what the home is worth. You will need to send a letter to your loan servicer asking them to remove the PMI. They will likely require you to pay for a new home appraisal to prove the current value. This can cost between three hundred and five hundred dollars, but it is usually money well spent if it means you no longer have to pay hundreds each month for insurance you do not need. You also need to have a good payment history. Generally, your mortgage payments must be current, with no late payments in the last twelve months, and no more than one late payment in the last twenty-four months.

There is an important exception to remember. If you have a Federal Housing Administration, or FHA, loan, the rules are different. For FHA loans taken out after June 2013, you cannot cancel the mortgage insurance premium, or MIP. You will pay it for the life of the loan unless you refinance into a conventional loan or sell the home. This is a major difference, so you should check your original loan documents to see what type of mortgage you have.

Many homeowners also wonder if they can get rid of PMI by making home improvements that increase the value of their property. The answer is yes, but it is a bit more complicated. If you add a new bathroom, finish a basement, or make other upgrades that raise your home’s appraised value, that extra value counts toward your equity. Again, you will need a new appraisal to prove the higher value, and you must meet the on-time payment requirements. Do not assume that just because you spent money on the house the lender will automatically recognize it.

One last thing to watch out for is the type of PMI you have. If you paid for your PMI as a lump sum at closing, known as single-premium PMI, you might not have a monthly payment to cancel, but the cost was folded into your loan. Similarly, lender-paid PMI means you pay a higher interest rate in exchange for the lender covering the insurance. In these cases, you cannot simply cancel the PMI by writing a letter. You would need to refinance to a new loan to change the structure.

The bottom line is that you should not wait for your lender to remind you. Mark a date in your calendar when you think you might have twenty percent equity. Keep an eye on home values in your neighborhood. If you suspect you have enough equity, call your loan servicer and ask what steps you need to take to request a cancellation. Removing PMI can lower your monthly payment by one hundred to three hundred dollars or more, money that could go toward savings, home maintenance, or anything else you choose.