When You Can Cancel Private Mortgage Insurance and How to Do It
Borrowers using less than a 20% down payment to buy a property typically have to get private mortgage insurance (PMI) if they want a conventional home loan.
In fact, about 40% of new mortgage applicants have to pay mortgage insurance, according to a 2021 Urban Institute report. That includes PMI for conventional loans and the equivalent fees for government-backed mortgages.
Monthly mortgage insurance payments can burden homeowners already battling rising costs. Fortunately, borrowers with good payment histories can eliminate these monthly payments by requesting PMI cancellation after increases to their property values push their equity past 20%.
What is PMI?
PMI protects lenders and mortgage-bond securitizers like Fannie Mae (FNMA) and Freddie Mac (FMCC) from losing money if loans go into default. Though PMI protects lenders, borrowers pay it, sometimes in the form of an additional monthly charge on their mortgage statement.
Underwriting guidelines require PMI when loan-to-value (LTV) ratios are more than 80% – meaning homeowners have less than 20% equity in their properties.
The perceived risk of the mortgage loan determines PMI rates.
“There are influencing factors in the rate,” Christi Hill, a real estate agent with Keller Williams Innovate, said in an interview. She cited debt-to-income ratio, credit score, LTV, number of borrowers, first-time homebuyer status, loan amount, and owner occupancy.
Deviations in these factors can significantly impact PMI rates, she said.
“The slightest differences could mean a big difference in the PMI amount,” Hill said.
For loans with a 90% LTV, average annual PMI rates vary from 0.28% to 0.94%, depending on credit score, according to the Urban Institute report. Borrowers with a credit score of 700 to 719 pay 0.55% of the remaining loan value, which works out to $91.67 monthly on a $200,000 balance.
PMI vs. Down Payments
Buyers might see PMI as a hassle that adds to the cost of their house. Hill looks at it differently.
“I like to refer to it mostly as the amount that you are paying to promise to pay the loan," Hill said. "The closer you get to 22%, the closer you are to keeping that promise from a lender’s point of view. I tell borrowers that you are making this promise to pay it back at a cost. That cost is the ‘insurance’ that it will be done. That, in turn, makes it affordable for you to buy a home with a lower down payment.”
Even when they have the means, some buyers might view paying PMI as preferable to making a sizeable down payment. One factor buyers may consider is how long they plan to own their home.
Buyers who plan on living in their home for only three to five years might opt to pay PMI instead of a larger down payment, Hill said.
“The additional money they would save from not putting the entire 20% down might be more valuable to them in the bank accounts," she said. "Essentially, it becomes case specific.”
Government-backed loans – meaning those guaranteed by the Federal Housing Administration (FHA), the Department of Agriculture (USDA), and the Department of Veterans Affairs (VA) – all have their own versions of mortgage insurance. These aren’t PMI since the agencies set these fees themselves, but they serve the same purpose – to protect the agencies from loan defaults.
In contrast to conventional loans, borrowers must pay these fees regardless of their down payment amount and often for the life of the loan.
FHA loans require an upfront “mortgage insurance premium” of 1.75%, due at closing, according to FHA fee schedules. On top of that, annual fees range between 0.40% and 0.75% of the remaining loan balance, paid in monthly installments.
USDA loans require an upfront “guarantee fee” currently set at 1%, according to USDA guidelines. Annual USDA premiums are 0.35% on the loan balance, paid monthly.
VA funding fees vary between 0.5% and 3.3% of the loan, due at closing. However, some buyers, such as veterans with a VA-rated disability, don’t have to pay the fee. This funding fee represents the total cost of mortgage insurance for the life of the loan, so VA borrowers don’t have to make monthly mortgage insurance payments.
When Can You Cancel Mortgage Insurance?
The Homeowners Protection Act (HPA) passed in 1998 regulates PMI, including when lenders may require it and when they must cancel it.
For conventional loans, buyers can request cancellation once they reach 20% equity, measured by the original home value. That means the LTV is 80%.
Mortgage lenders must automatically cancel PMI once the LTV reaches 78% or the buyer reaches 22% equity, using the original purchase price.
Buyers must also have a good payment history, which the HPA defines as not having paid more than 60 days late during the past 24 months and 30 days late during the past 12 months. Borrowers must also be current on their loan to receive a requested or automatic cancellation of PMI.
How to Cancel PMI
When their LTV reaches 80%, borrowers can request PMI cancellation by submitting a written request to their loan servicer, according to the Homeowners Protection Act.
Mortgage servicers, the companies that send borrowers their monthly bills, might not approve a PMI cancellation request.
“The borrower can request the PMI to be dropped off at 20%, but it is not guaranteed,” said Hill, the real estate agent. “They would have to first have an appraisal done on the property through the loan servicer to determine if they would be willing to drop it.”
Additionally, PMI cancellation can be a slow process, Hill said.
“You need to be very familiar with your home’s value to request this at the right time," she said.
But when the LTV or a mortgage loan reaches 78% – meaning the borrower reaches 22% equity – the HPA requires servicers to cancel PMI automatically, as long as the borrower is current on payments.
But is this process genuinely automatic?
“As far as the automatic procedure, yes, it has been my experience that this is automatic once the loan to value is at 22%,” Hill said.
Borrowers with government-backed mortgages don’t have these mortgage insurance cancellation options. USDA loans must pay guarantee fees for the life of the loan. For FHA loans, borrowers who put less than 10% down must pay mortgage insurance premiums for the life of the loan. However, borrowers who put more than 10% down on FHA loans can escape mortgage insurance after 11 years of payments,
Otherwise, the only way borrowers can avoid FHA and USDA insurance fees is to pay them off or refinance them into a conventional loan, according to government-backed lending guidelines.