Private mortgage insurance, or PMI, is the monthly charge most lenders add to a conventional mortgage when the buyer puts down less than 20 percent. It protects the lender, not the homeowner, and on many loans it adds a noticeable amount to the payment. It also does not have to last for the life of the loan. Federal law, the Homeowners Protection Act, sets three points at which it can or must end, and the Consumer Financial Protection Bureau describes each one.

These rules apply to mortgages on a single-family principal residence that closed on or after July 29, 1999. Loans insured by the Federal Housing Administration and loans guaranteed by the Department of Veterans Affairs work differently, and so does lender-paid mortgage insurance, where the cost is built into the rate.

Exit 1: you ask, at 80 percent

A borrower may ask the servicer to cancel PMI once the principal balance is scheduled to reach 80 percent of the home's original value. The date the loan reaches that point on its normal schedule is listed on the PMI disclosure form the borrower received at closing. Paying extra principal can get the balance there sooner, and the request can be made as soon as it does.

The servicer must grant the request if four conditions are met:

  • The request is made in writing.
  • The borrower has a good payment history and is current on the loan.
  • The borrower certifies there are no junior liens on the home, such as a second mortgage or home equity line.
  • The borrower can show the home's value has not fallen below its original value, which the servicer may ask to see in the form of an appraisal.

Original value has a specific meaning here: generally the lower of the purchase price or the appraised value at the time of purchase. For a refinanced loan, it is the appraised value used for the refinance. Rising home prices since the purchase do not change the 80 percent calculation under the federal rule, although an investor's own guidelines may allow more.

Exit 2: automatic, at 78 percent

If the borrower never asks, the servicer must end PMI on its own on the date the principal balance is scheduled to reach 78 percent of the original value. No letter and no appraisal are needed. The borrower does have to be current on payments; if not, the termination happens once the loan is brought current.

Exit 3: the midpoint of the loan

PMI must also end the month after the midpoint of the loan's amortization schedule, even if the balance has not yet reached 78 percent. On a 30-year mortgage, that is after 15 years. This backstop matters most for loans that pay down principal slowly, such as those with interest-only periods, principal forbearance or a balloon payment. Again, the borrower must be current.

Loans owned by Fannie Mae and Freddie Mac

Many conventional mortgages are owned by Fannie Mae or Freddie Mac, and their guidelines can allow cancellation earlier than the federal schedule. Those investor rules cannot be less favorable to the borrower than the federal minimums. The servicer can say which rules apply to a particular loan and what documentation it requires.

What to gather before calling the servicer

The useful documents are the PMI disclosure from closing, a recent mortgage statement showing the principal balance, the original purchase price and appraisal, and a record of any second liens. With those in hand, the question for the servicer is specific: what date does the loan reach 80 percent of original value, what does a cancellation request need to include, and will an appraisal be required, and at whose cost.

This article reports rules, data and expert guidance. It is not legal, tax, insurance or financial advice. Talk to a licensed pro, your tax advisor or your insurer before you act on it.

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