When your lender is required to cancel PMI
Do you have private mortgage insurance? Did you know that your lender is required to automatically cancel it when you have paid your mortgage down to a certain point?
Under the Homeowners Protection Act, your lender must cancel your PMI when the loan-to-value ratio on your mortgage reaches 78%.
This rule applies if your loan closed on or after July 29, 1999.
However, it does not apply to FHA or VA loans.
A 78% LTV means that compared to your original mortgage principal, you have paid 22% and owe 78%. On a $200,000 mortgage, you’d be at 78% LTV when your principal balance was $156,000.
You also must be current on your to mortgage for automatic cancellation to kick in.
Here’s an example of when you can expect to reach this point if you make all your payments on schedule and don’t pay anything extra:
- Purchase price: $200,000
- Down payment: 5%
- Mortgage amount: $190,000
- Term: 30 years
- Interest rate: 5%
- Principal balance at 78% LTV: $156,000
- Time to reach 78% LTV: 9 years, 9 months
If the lender doesn’t automatically cancel mortgage insurance when your loan balance falls to 78%, it must refund the excess premiums to you.
Under the law, you can get rid of PMI even sooner by requesting cancellation yourself.
When you’ve reached 80% LTV, you can ask your lender to cancel your mortgage insurance as long as you’re current on your loan and don’t have a second mortgage, such as a home equity loan or line of credit.
Is requesting the cancellation worth your trouble? Let’s do the math.
Given the same loan terms as in the previous example, here’s when you’d reach 80% LTV:
- Principal balance at 80% LTV: $160,000
- Time to reach 80% LTV: 8 years, 10 months
- Potential savings: 11 months’ worth of payments
Assuming your insurance costs $100 to $200 a month, it certainly seems worth it to request the earlier cancellation and save an extra $1,100 to $2,200.
Of course, you could also request to have it cancelled if you believe your home value has increased beyond the 80% threshold. That's not a likely scenario in this market, however.