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How to Stop Paying Private Mortgage Insurance

ByWallstreet Observer

Quick answer

  • Private Mortgage Insurance (PMI) is typically required by lenders if your down payment is less than 20% of the home’s purchase price.
  • You can request cancellation of PMI once your loan-to-value (LTV) ratio reaches 80%.
  • PMI will automatically terminate when your LTV reaches 78%, provided you are current on payments.
  • To cancel early, you’ll likely need an appraisal to prove your home’s value has increased or the loan balance has decreased significantly.
  • Keep meticulous records of your mortgage payments and home value estimates.
  • Contact your mortgage servicer directly to understand their specific cancellation policies and requirements.

What to check first (before you buy or change coverage)

Before you take steps to remove Private Mortgage Insurance (PMI), it’s crucial to understand your current mortgage situation and the lender’s policies. Rushing the process without proper preparation can lead to unnecessary costs or delays.

Coverage needs

Your initial “coverage need” for PMI was dictated by your lender based on your loan-to-value (LTV) ratio at the time of purchase. This insurance protects the lender, not you, in case you default on your loan with a low down payment. Understanding that PMI is a lender protection is the first step in recognizing it’s not a permanent fixture of your mortgage.

Deductibles and premiums

While PMI doesn’t have a “deductible” in the traditional insurance sense (as it’s not for your benefit), it does have a “premium.” This premium is usually rolled into your monthly mortgage payment. You need to know the exact amount of your monthly PMI premium to understand the savings you’ll achieve by eliminating it. Check your mortgage statements or contact your loan servicer to confirm this amount.

Exclusions and limits (general)

PMI itself doesn’t have exclusions or limits in the way homeowners insurance does. However, the terms under which it can be canceled are defined by the Homeowners Protection Act of 1998 (HPA) and your specific mortgage loan agreement. The HPA sets the general rules for when PMI must be canceled, but your loan terms might offer more favorable cancellation options. It’s essential to review your original loan documents for any specific clauses related to PMI cancellation.

Claim process

Since PMI is for the lender’s protection, you won’t be involved in a “claim process” for PMI itself. If you were to default on your loan, the lender would make a claim against the PMI policy. Your focus should be on ensuring you never need to worry about this by making timely payments and actively working to remove PMI as soon as you are eligible.

Bundling and discounts (general)

PMI is a component of your mortgage, not a separate insurance policy you can bundle or get discounts on in the traditional sense. However, lenders might offer incentives or have different PMI requirements based on other financial products you hold with them. More relevantly, once you eliminate PMI, your overall monthly housing payment will decrease, freeing up cash flow. Consider how you might reinvest or allocate these savings, perhaps towards other financial goals or even additional mortgage principal payments to build equity faster.

Step-by-step (simple workflow)

Eliminating Private Mortgage Insurance (PMI) requires a systematic approach. By following these steps, you can navigate the process efficiently and save money.

1. Determine your current Loan-to-Value (LTV) ratio.

  • What to do: Find your current mortgage balance and the most recent estimated market value of your home. Divide the mortgage balance by the home value.
  • What “good” looks like: An LTV of 80% or lower. For example, if your mortgage balance is $200,000 and your home is valued at $250,000, your LTV is 80%.
  • A common mistake and how to avoid it: Using the original purchase price of your home as its current value. Avoid this by getting a recent comparative market analysis (CMA) from a real estate agent or a professional appraisal.

2. Review your mortgage loan documents.

  • What to do: Locate your original mortgage agreement and any addendums. Look for sections detailing PMI, specifically cancellation terms.
  • What “good” looks like: Clear language outlining when PMI can be canceled, either at your request or automatically, based on LTV.
  • A common mistake and how to avoid it: Assuming all PMI cancellation policies are the same. Avoid this by reading your specific loan terms, as they can vary.

3. Check the Homeowners Protection Act (HPA) guidelines.

  • What to do: Familiarize yourself with the federal law that mandates PMI cancellation under certain conditions. The HPA generally requires lenders to automatically terminate PMI when your LTV reaches 78%, provided you are current on payments.
  • What “good” looks like: Understanding your rights under federal law, which provides a baseline for cancellation.
  • A common mistake and how to avoid it: Believing the HPA is the only way to cancel PMI. Avoid this by remembering that lenders may allow earlier cancellation based on your loan terms or a new appraisal.

4. Contact your mortgage servicer.

  • What to do: Call the customer service number for your mortgage servicer (the company you send payments to). Inquire about their specific PMI cancellation policy and the required LTV for cancellation.
  • What “good” looks like: Receiving clear information about their requirements, including the necessary LTV percentage and any required documentation.
  • A common mistake and how to avoid it: Not asking specific questions. Avoid this by preparing a list of questions beforehand, such as “What is the LTV required for cancellation?” and “Do I need an appraisal?”

5. Determine the required LTV for cancellation.

  • What to do: Based on your loan documents and your servicer’s information, identify the LTV percentage at which you can request PMI cancellation. This is often 80%, but can sometimes be earlier.
  • What “good” looks like: Knowing the exact LTV threshold you need to meet.
  • A common mistake and how to avoid it: Guessing the LTV. Avoid this by getting confirmation directly from your servicer.

6. Assess your home’s current market value.

  • What to do: Research recent home sales in your neighborhood. You can get a general idea from online real estate sites or by asking a local real estate agent for a comparative market analysis (CMA).
  • What “good” looks like: A realistic estimate of your home’s current market value, which helps determine if you’ve reached the target LTV.
  • A common mistake and how to avoid it: Overestimating your home’s value. Avoid this by using objective data and recent sales comparables, not just your personal opinion.

7. Calculate your current LTV based on estimated value.

  • What to do: Use your current mortgage balance and your estimated home value to calculate your LTV.
  • What “good” looks like: An LTV that meets or is close to the required percentage for cancellation.
  • A common mistake and how to avoid it: Using an outdated mortgage balance. Avoid this by checking your latest mortgage statement for the most accurate current balance.

8. If your LTV is 80% or below, formally request cancellation.

  • What to do: Submit a written request to your mortgage servicer to cancel PMI. State that you meet the LTV requirement and reference your loan agreement or the HPA.
  • What “good” looks like: A written confirmation from your servicer acknowledging your request and outlining the next steps.
  • A common mistake and how to avoid it: Making a verbal request only. Avoid this by always following up with a written request, which serves as documentation.

9. If your LTV is above 80%, consider an appraisal.

  • What to do: If your home’s value has increased or your loan balance has decreased enough to get you to the target LTV, but your servicer’s valuation methods don’t reflect this, you may need a professional appraisal. Order an appraisal to get an official valuation.
  • What “good” looks like: An appraisal that supports a home value high enough to bring your LTV to 80% or below.
  • A common mistake and how to avoid it: Paying for an appraisal without confirming your servicer will accept it for PMI cancellation. Avoid this by asking your servicer if they require a specific appraisal company or if they will accept an independent appraisal.

10. Submit the appraisal to your servicer.

  • What to do: If the appraisal confirms your LTV is at or below the required threshold, provide a copy of the appraisal report to your mortgage servicer.
  • What “good” looks like: Your servicer confirming that the appraisal meets their requirements and approving your PMI cancellation.
  • A common mistake and how to avoid it: Not including all required documentation with the appraisal. Avoid this by asking your servicer for a checklist of everything they need.

11. Confirm PMI cancellation and adjust payments.

  • What to do: Once your cancellation is approved, ensure PMI is removed from your monthly payment. Verify this on your next mortgage statement.
  • What “good” looks like: Your mortgage payment decreasing by the amount of the PMI premium.
  • A common mistake and how to avoid it: Assuming PMI has been removed without verification. Avoid this by carefully reviewing your mortgage statements for several months after cancellation is approved.

12. Continue making on-time payments.

  • What to do: Maintain a good payment history. This is crucial for both automatic termination and for demonstrating your creditworthiness if you need to request early cancellation.
  • What “good” looks like: A history of consistent, on-time mortgage payments.
  • A common mistake and how to avoid it: Falling behind on payments once you think PMI is gone. Avoid this by remembering that maintaining good standing is always important for your mortgage.

Common mistakes (and what happens if you ignore them)

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