When Can I Stop Paying For Mortgage Insurance?

You can typically stop paying for mortgage insurance once your loan is paid down to 78 percent of the original value.

May 17, 2014 at 1:00PM

You can typically stop paying for mortgage insurance once your loan is paid down to 78 percent of the original value. In theory it should automatically cancel, but there are situations where it could take somewhat longer or even considerably shorter than that.

The fact is, mortgage insurance didn't always automatically cancel, and borrowers didn't always know they could cancel it, either. Way back in the early and mid-1990s, millions of homeowners came out to refinance loans and discovered that they'd been paying for mortgage insurance long after their growing home equity and regular amortization made it unnecessary.

While they may have been happy to discover they no longer needed MI, many were not pleased that there was no mechanism in place to notify them that they no longer needed it -- let alone some way to cancel it. While some lenders did allow borrowers to challenge the need for MI, for many the only way out was to get a new loan by refinancing.

Cancellation law
These unhappy borrowers found an ally in Jim Hensen, a Utah congressman who had his own problems canceling PMI on his Beltway condo. His travails led to the eventual passage of the Homeowner Protection Act (HPA).

Made law in 1998 and effective in July 1999, HPA mandates annual notification to eligible borrowers that their policy can be cancelled. It also spells out the conditions under which a PMI policy can be cancelled automatically -- typically, when the original loan balance is paid down to 78 percent of the original value of the home, based upon the original payment schedule. However, this sunset provision covers only those loans originated after July 29, 1999. Earlier loans have no such automatic cancellation.

Of course, this doesn't apply to delinquent borrowers.  With a less-than-stellar payment history, especially in the last year or two, you may have to wait a while. The law states that in the 12 months leading up to the automatic cancellation, the borrower can have no payments which were more than 30 days overdue. In addition, in the past 24 months leading up to the auto-cancel, the borrower can have no payments which were 60 or more days past due.

If there are late payments in the borrower's payment history, they will have to wait until consecutive "late-free" periods are built, or until the loan is paid down to a 77 percent LTV level.

There has always been an informal borrower-lender relationship with regards to PMI cancellation, provided you knew you had PMI and were aware that it could be cancelled at some point. If you didn't, you simply paid PMI until you refinanced or the loan was paid off. Now, however, HPA requires that at least once per year, the lender must notify you that your PMI may be cancelled, provided certain conditions are met. This applies to single-family principal residences only.

Getting to 78 percent: Amortization and appreciation
Two factors work in your favor when it comes to building enough equity to cancel your PMI:

  1. Amortization -- the process of paying off your mortgage -- is a slow, steady, but guaranteed process
  2. Appreciation (a.k.a home price inflation), however, is a fickle, unpredictable process which can quickly bring gains in an active housing market, but can also cost you equity in periods of economic downturns

How long will it take to get to an 80 percent LTV ratio, through amortization alone? Simply put, it will take years.

As an example, a $90,000 loan ($100,000 purchase price, i.e. 10 percent down) with a 30-year term at 4 percent results in a monthly payment of $477.42.  (Note: the higher your loan's interest rate is, the longer it will take to reach the 80 percent LTV level).

In the early years of your mortgage, most of your payment is comprised of interest, so you barely make a dent in the principal you owe.


You won't reach a remaining balance of $80,000 (80 percent) where you can request cancellation of your MI until the 69th payment, late in the fifth year. Amortization is truly the slow and steady way to build equity. For a 15-year term, the period is cut to less than three years, since you're paying down the outstanding principal much faster.

However, inflation/appreciation can greatly accelerate your equity stake. Compare the amortization above with 1 percent price appreciation to see how much more quickly you'll get to 80 percent:


With just 1 percent appreciation and regular, timely payments, you might be able to cancel your PMI as early as the end of year four, instead of somewhere in the fifth year. Of course, greater levels of appreciation speed up the process, and declining home values in your area would prolong it.

How soon can I cancel my mortgage insurance?
Our interpretation of the HPA law -- and Fannie Mae's position -- is that a borrower holding a loan with less than two years of seasoning and solid payment history would find it difficult, if not impossible, to have their PMI cancelled, regardless of local market appreciation, unless they have significantly accelerated their payments in some way -- by prepaying, for example, or in an instance where the homeowner has done a considerable amount of home improvement – and even then will need to be at a 75 percent LTV ratio, verified by a full appraisal of the property.

If you're interested in the full, actual text of the HPA law, you can find a copy on the FDIC's website at http://www.fdic.gov/news/news/inactivefinancial/1999/useftp.pdf-- but a fairly plain-language version can be found in the FDIC's compliance manual at http://www.fdic.gov/regulations/compliance/manual/pdf/V-5.1.pdf -- where all of the rights and responsibilities of the lender or servicer are spelled out.

This article When Can I Stop Paying For Mortgage Insurance? originally appeared on HSH.com.

Take advantage of this little-known tax "loophole"
Recent tax increases have affected nearly every American taxpayer. But with the right planning, you can take steps to take control of your taxes and potentially even lower your tax bill. In our brand-new special report "The IRS Is Daring You to Make This Investment Now!," you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

You may also enjoy these real estate articles:

Everything you need to know about mortgage insurance

Current mortgage rates

How much does my down payment need to be?

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers