Mortgage insurance cancellation allows homeowners to stop paying additional insurance premiums once they have enough equity in their homes, usually when the loan-to-value (LTV) ratio falls to 80% or lower. This insurance, known as Private Mortgage Insurance (PMI) for conventional loans or Mortgage Insurance Premium (MIP) for FHA loans, protects lenders against loan default risks when buyers make less than a 20% down payment.
How Does Mortgage Insurance Work?
When borrowers put down less than 20%, lenders require mortgage insurance to reduce their financial risk. PMI protects the lender if you fail to pay your mortgage, but it does not protect the homeowner. Once you build sufficient equity, you can request cancellation or wait for automatic termination as outlined by the Homeowners Protection Act (HPA).
Understanding Loan-to-Value (LTV) Ratio
Your LTV ratio compares your current loan balance to your home’s value:
LTV = (Current Loan Balance ÷ Home Value) × 100
For example, owing $240,000 on a $300,000 home means an 80% LTV. Mortgage insurance cancellation is generally possible when your LTV hits this threshold.
How to Cancel Mortgage Insurance on Conventional Loans
There are two main ways:
- Borrower-Requested Cancellation: You can ask your lender to cancel PMI once your loan balance reaches 80% of your home’s original value (purchase price or appraisal value at loan initiation), provided you have a good payment history and no additional liens. Your lender may require a new home appraisal to verify value.
- Automatic Termination: Lenders must automatically cancel PMI when your loan balance reaches 78% of the home’s original value, assuming you’re current on payments. This is based on the original amortization schedule and not accelerated repayments.
Mortgage Insurance on Government-Backed Loans
Rules differ for FHA, VA, and USDA loans:
- FHA Loans: For loans after June 3, 2013, if your down payment was less than 10%, you must pay MIP for the loan’s life; otherwise, MIP cancels after 11 years.
- VA Loans: No monthly mortgage insurance is required, but there is a one-time funding fee.
- USDA Loans: Guarantee fees act like mortgage insurance and are generally not cancelable.
Common Mistakes to Avoid
- Don’t assume PMI will cancel automatically; proactively check your equity and request cancellation.
- Remember, mortgage insurance is distinct from homeowners insurance.
- Making extra payments reduces principal faster, helping you reach cancellation thresholds sooner.
FAQs
Can refinancing eliminate PMI?
Yes. Refinancing into a conventional loan with less than 80% LTV can remove PMI.
Is a new appraisal needed?
Typically yes, especially when requesting cancellation based on increased home value.
What if my home’s value decreases?
You must wait for the loan to reach 78% of the original value for automatic cancellation; current lower appraised value won’t trigger earlier cancellation.
For detailed official guidance, visit the Consumer Financial Protection Bureau’s page on PMI cancellation here.
