When securing a Conventional Loan, one of the most significant costs outside of your principal and interest payment is Private Mortgage Insurance, or PMI. This monthly fee can add hundreds of dollars to your payment, but unlike the MIP on an FHA loan, PMI is not permanent.
Federal law provides specific rules for when PMI must be automatically terminated and when you can request its removal earlier. Understanding these rules is crucial to maximizing your savings as a homeowner.
What is Private Mortgage Insurance (PMI)?
Private Mortgage Insurance (PMI) is an insurance policy that protects the mortgage lender—not the borrower—in case the borrower defaults on the loan. Lenders typically require PMI whenever a borrower takes out a Conventional Loan with a Loan-to-Value (LTV) ratio of 80% or higher (meaning you put down less than 20%).
- Who Pays It? The borrower pays the premium, usually as a monthly installment included in the mortgage payment.
- How Much is It? PMI costs vary based on your credit score tier, typically ranging from 0.5% to 1.5% of the loan amount per year.
- The Difference: PMI (Conventional Loans) is cancellable. MIP (FHA Loans) is often permanent. Review our FHA vs. Conventional Comparison Guide for a side-by-side look.
1. Path 1: Automatic Termination (The 78% Rule)
Under the Homeowners Protection Act, your servicer must automatically terminate PMI when your loan balance is first scheduled to reach 78% of the original value of your home (the lesser of the purchase price or original appraisal).
- The Catch: This is based on the original amortization schedule. Making extra payments won’t necessarily trigger “automatic” removal early; you may still need to request it.
- Requirement: You must be current on your payments on the date of termination.
2. Path 2: Requesting Early Cancellation (The Proactive Method)
You do not have to wait for your loan to reach the 78% threshold. You can proactively request cancellation when your equity hits 20% of the home’s original value, which corresponds to an 80% LTV ratio.
Key Requirements for Early Request:
To approve your request, your servicer will require:
- Written Request: A formal letter requesting PMI removal.
- Good Payment History: Typically no 30-day late payments in the last 12 months and no 60-day lates in the last 24 months. See our Credit Score Improvement Guide.
- No Second Liens: You cannot have a HELOC or second mortgage that pushes your total debt back above 80% LTV.
- Value Certification: The lender may require a new appraisal to prove the home hasn’t lost value.
The Role of Home Value and Appreciation
In high-growth markets like Overland Park or the Kansas City Metro, your home may reach 80% LTV much faster through market appreciation or improvements rather than just monthly payments.
Using a New Appraisal for Removal
If you believe your home’s value has increased significantly, you can request cancellation based on Current Value. However, most lenders (following Fannie Mae/Freddie Mac guidelines) require:
- The 2-Year Rule: If you’ve owned the home for 2–5 years, you generally need to reach 75% LTV based on the new value.
- The 5-Year Rule: If you’ve owned the home for over 5 years, you can usually cancel at 80% LTV of the new value.
- Substantial Improvements: If you have made significant renovations (e.g., a finished basement or kitchen remodel), the “seasoning” or time-owned requirements are often waived.
Ready to stop paying for mortgage insurance? Read our step-by-step Conventional PMI Cancellation Guide to learn how to request removal based on your home’s current value.