Private mortgage insurance (PMI): how to remove it

What PMI is and when you pay it

Private mortgage insurance protects the lender, not you, if you stop paying. The Consumer Financial Protection Bureau (CFPB) says borrowers who put down less than 20 percent of the purchase price typically must pay for mortgage insurance on a conventional loan. It raises your cost of borrowing and is usually paid monthly, with little or no upfront cost at closing.

No federal rule sets the price. The CFPB says conventional PMI rates depend on your down payment and your credit score. The premium appears on your Loan Estimate and Closing Disclosure, so compare it across lenders. For the full list of closing lines, see closing costs explained.

PMI applies to conventional loans. FHA loans carry their own mortgage insurance, and VA loans have a funding fee instead; see FHA loans and VA loans. The CFPB notes that the removal rules below cover single-family principal residences with loans closed on or after July 29, 1999, and that FHA and VA loans follow different requirements.

Three ways PMI ends

The Homeowners Protection Act (HPA) gives conventional borrowers three exits.

1. You ask at 80 percent (cancellation). Your PMI must be canceled once you reach the “cancellation date” and meet four conditions (12 U.S.C. § 4902(a)):

• You send a written request to your servicer.
• You have a good payment history.
• You are current on your payments.
• You meet any requirement the loan holder sets for evidence that the property value has not fallen below its original value, and certify that no subordinate lien (such as a second mortgage) sits on the home.

The statute defines a good payment history as no payment 60 days or more past due in the 12-month period that begins 24 months before the later of the cancellation date or your request, and no payment 30 days or more past due in the 12 months before that later date (12 U.S.C. § 4901).

2. The servicer ends it at 78 percent (automatic termination). On the “termination date,” PMI ends if you are current. If you are behind that day, it ends on the first day of the first month after you catch up (§ 4902(b)).

3. Final termination at the midpoint. If neither of the first two applies, PMI cannot continue past the first day of the month after the midpoint of the loan’s amortization period, if you are current (§ 4902(c)). On a 30-year loan, the midpoint is after 15 years.

Which “80 percent” counts

The law works from the original value of the home, not today’s value. Original value is the lesser of the contract sales price or the appraised value at closing. On a refinance, it is the appraised value the lender relied on to approve the loan (§ 4901).

For a fixed-rate loan, the 80 percent request date can be either of two things, at your option: the date the balance is first scheduled to reach 80 percent under the original amortization schedule, or the date the balance actually reaches 80 percent through your payments. Extra payments can therefore bring the request date forward. The 78 percent termination date, however, is based only on the initial schedule, whatever you have actually paid.

What it looks like: a worked example

This is an illustration, not a quote. Assume a $400,000 purchase price (also the appraised value), a 10 percent down payment, and a $360,000 30-year fixed loan at an assumed 6.00 percent. The monthly principal and interest is about $2,158.

On the original schedule you could ask to cancel at month 89. If extra payments bring your actual balance to $320,000 sooner, you can ask then. Without a request, PMI would end at month 103. Once PMI ends, the servicer may not require more payments for it after the deadlines in § 4902(e), generally within 30 days of your qualifying request or the termination date.

After PMI ends

The servicer must return any unearned premiums within 45 days after the PMI is canceled or terminated (§ 4902(f)). Your monthly payment drops by the PMI amount. If your lender collects taxes and insurance in an escrow account, ask your servicer to confirm the new total payment in writing.

Exceptions to know

• High-risk loans. The cancellation and automatic termination rules do not apply to loans classified as high risk when they close, under guidelines published by Fannie Mae and Freddie Mac (§ 4902(g)). The midpoint rule still applies.
• Modified loans. If you and the lender modify the loan, the dates are recalculated using the new terms (§ 4902(d)).
• Looser investor rules. The CFPB says Fannie Mae and Freddie Mac may allow earlier removal, but not on terms less favorable than the law.
• Value dropped. If your home’s value has fallen below its original value, your servicer may refuse to cancel at 80 percent.

Where states differ

The Homeowners Protection Act applies in every state, so the 80 percent, 78 percent and midpoint rules do not change at the state line. What differs is how much you pay at closing and how state law treats the rest of the purchase. See closing costs in Texas or closing costs in California for state examples, and FHA loans if your loan is not conventional.