If you make a down payment of less than 20% on a home purchase, you may have to pay private mortgage insurance (PMI) or another form of mortgage insurance. This is in place to safeguard the lender in the event you default on your mortgage loan.
Fortunately, mortgage insurance can be removed under the right circumstances.
Automatic PMI Cancellation
PMI is a form of insurance protection for your mortgage lender that you will be required to pay if you put down less than 20% on a conventional mortgage loan backed by Fannie Mae or Freddie Mac. This insurance safeguards the lender in case you can’t repay your mortgage debt and default on the loan.
Your loan-to-value (LTV) ratio and the size of your down payment will help determine if and when PMI can be eliminated. LTV indicates your mortgage loan amount versus the appraised value of your home.
Let’s say you make a 10% down payment on a home purchase. That means your LTV ratio is 90%.
Most lenders prefer an LTV of 80% or less, but will still let you borrow funds if you meet other requirements, although conventional loan lenders will require that you pay PMI until your LTV improves.
Once your LTV reaches 78% (which typically means you’ve earned 22% equity in your property), the fee you pay for PMI will be automatically eliminated from your conventional loan.
Note that your LTV can also decrease, getting you closer to removing PMI, if your home appreciates in value, which can occur if you make effective home improvements.
Requesting PMI Cancellation
Once you’ve built up enough equity in your home, typically when your LTV ratio reaches 80% based on your original purchase price, you can formally request that your lender cancel your PMI.
Start by contacting your mortgage servicer’s customer service department to ask about their specific PMI cancellation process. Most servicers will require a written request, so be prepared to submit a simple letter or complete their online form. In your request, include your loan number, current balance, and a statement that your LTV has reached the eligible threshold.
Many lenders also require evidence that your home’s value hasn’t declined. You may need to provide a recent appraisal or a broker’s price opinion showing that your remaining principal balance is no more than 80% of the home’s current market value.
Once your servicer has all documentation, they’ll review your file and, assuming your account is in good standing (no late payments in the past year, for example), formally remove the PMI within one to three billing cycles.
Refinancing to Cancel PMI
If you’re not yet at the 80% LTV mark based on your original purchase price but want to ditch PMI sooner, refinancing into a new mortgage can be an effective route. First, check current market rates and compare them to your existing rate; if rates have dropped by at least 0.75%–1%, a refi could not only eliminate PMI but also lower your overall interest cost.
Here are the steps you should follow to cancel:
- Run the numbers: Calculate your current loan balance and estimate your home’s present market value (via an online estimate or a formal appraisal). If your balance is 80% or less of today’s value, you qualify to refinance without PMI.
- Choose the right loan type: Refinancing with a conventional mortgage is the most common route, because FHA refinance rules still require MIP.
- Prepare documentation: Just like your original mortgage, you’ll need to submit income verification, credit information, and proof of homeowners insurance. Also order an appraisal or negotiate to use a recent appraisal if your lender accepts it; this valuation confirms your LTV.
- Lock in your rate and close: Once you’ve selected a lender and locked in your rate, you’ll go through underwriting and closing. At closing, your new loan pays off the old one—and because your LTV is now verified at 80% or less, there’s no PMI premium added to your monthly payments moving forward.
Get started with Refi.com to see how much you can save with a refinance.
differences between PMI and other types of mortgage insurance
PMI specifically applies to conventional mortgage loans not backed by the federal government. But some government-backed loans also require recurring fees and mortage insurance.
FHA Loan MIP
Borrowers opting for an FHA loan are required to pay an upfront mortgage insurance premium (MIP) equal to 1.75% of your loan amount. They also have to pay an annual MIP payment of their loan amount based on the size of the loan and the amount of money put down at closing.
Unlike PMI, annual MIP will not automatically fall off when the FHA loan reaches a certain LTV. In most cases, that premium is required to stay on for the life of the loan. But if you put down at least 10% on an FHA loan, the MIP is required to remain in place for only the first 11 years, after which time it will fall off automatically.
USDA Guaranteed Fee
USDA loans, a great 0% down loan for rural buyers, don’t have a mortgage insurance premium. But they do charge a guarantee fee, which functions like mortgage insurance because it helps guarantee the financing.
You’ll pay an upfront one-time guarantee fee of 1% of your loan amount, plus an annual guarantee fee (paid monthly) that equates to 0.35% of your loan amount, which you must pay over the life of the USDA loan.
VA Funding Fee
VA loans, another 0% down loan option also don’t charge PMI or any other form of mortgage insurance. However, as with a USDA loan, you’ll have to pay a one-time funding fee equivalent to between 0.5% and 3.30% of your loan amount (although some VA borrowers are exempt).
The bottom line
It’s important to weigh the pros and cons of a PMI elimination strategy. Yes, you can eventually remove PMI if you pay extra toward your principal to lower your LTV, or if you pull the trigger on costly home improvements to increase your home’s value.
Before you decide, run the numbers: compare your remaining balance against current home values, factor in closing or appraisal fees, and weigh how long you’ll need to hold your new rate to recoup any refinance costs. If you’re already on steady financial footing, with a solid payment history and stable income, you’ll maximize the payoff of dropping PMI.
