When can you drop pmi on a conventional loan

If you have private mortgage insurance, you’re probably looking forward to the day when it ends, sweetly reducing your mortgage payment.

Although you pay for PMI, the coverage protects the lender, not you, against the risk that you'll stop making your mortgage payments. Nearly 18% of mortgages in the U.S. have PMI, and homeowners with PMI, on average, will make payments for 5 1/2 years before the insurance ends, according to U.S. Mortgage Insurers, a Washington, D.C.-based industry group.

Your mortgage servicer is required to cancel your PMI for free when your mortgage balance reaches 78% of the home’s value, or the mortgage hits the halfway point of the loan term, such as the 15th year of a 30-year mortgage. You may be able to get rid of PMI earlier by asking the mortgage servicer, in writing, to drop PMI once your mortgage balance reaches 80% of the home’s value at the time you bought it.

Here’s a closer look at those options and two others for getting rid of PMI. These apply only to private mortgage insurance for conventional loans. The rules are different for mortgage insurance for government-backed mortgages, like FHA loans.

1. Wait for automatic cancellation

Eventually, your mortgage insurance will fall away automatically, but it's a good idea to keep track.

Request a written copy of your PMI cancellation schedule and your lender’s requirements, advises Lindsey Johnson, president of U.S. Mortgage Insurers. Call the number on your monthly mortgage statement, long before you need it, she says. That way you’ll know when your payments are supposed to stop and can watch your progress.

2. Request PMI cancellation sooner

You can save money by acting to remove PMI sooner. “When your mortgage balance reaches 80% of your home’s original value — the lesser of the sales price or the appraised price at origination — your mortgage servicer must cancel [PMI] at your written request,” says Marc Zinner, vice president of commercial operations at Genworth, one of the largest private mortgage insurance companies.

“When your mortgage balance reaches 80% of your home’s original value ... your mortgage servicer must cancel [PMI] at your written request.”

The percentage represents what’s called your loan-to-value ratio. To find the LTV, divide the loan balance by the original purchase price or use NerdWallet’s loan-to-value calculator.

Check your PMI schedule, which is based on your home’s original value, to track your progress. Make a written request to your lender several months before the mortgage is scheduled to hit 80% LTV and get the process moving.

To make the case for cancellation you’ll need:

• A good payment history. The rule is no payments 30 days late in the past 12 months and no 60-day late payments in the previous 24 months. Timely payments count when it comes to getting rid of PMI. Late payments can put you in a high-risk category, making it harder to cancel.

• No other liens. Your mortgage must be the home’s only debt, including second mortgages, home equity loans and lines of credit.

• Proof of value. A home appraisal, at your expense, to prove the home’s value hasn’t fallen. Certain lenders accept a broker price opinion instead.

If property values are rising where you live, you can request early cancellation based on the home’s current value. Your home may also have increased in value if you’ve done any home improvements, such as upgrading the kitchen or adding a bedroom. You’ll probably need a new appraisal.

But before spending $300 to $500 on an appraiser, check your lender’s rules. Some lenders require borrowers to use certain appraisers. Others accept a broker price opinion, a quicker process costing about half or less of an appraiser’s fee.

Here’s a caveat: To cancel based on current value, you must have owned the home for at least two years and have 75% LTV. If you've owned the home for at least five years, you can cancel at 80% LTV.

4. Refinance to get rid of PMI

If interest rates have dropped since you took out the mortgage, then you might consider refinancing to save money. Besides getting a lower rate, refinancing might also let you get rid of PMI if the new loan balance will be less than 80% of the home’s value.

But refinancing will require paying closing costs, which can include myriad fees. You’ll want to make sure refinancing won’t cost you more than you’ll save. Use our refinance calculator to help decide whether it’s time to refinance.

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Occasionally, borrowers and lenders knock heads over canceling PMI. If you run into insurmountable obstacles when trying to cancel, complain to the Consumer Financial Protection Bureau at 855-411-CFPB (2372).

Ray Rodriguez, a regional sales manager for TD Bank, based in Cherry Hill, New Jersey, says lenders vary in how they work with borrowers over canceling PMI. Think about mortgage insurance when getting a mortgage, he says. Tell the lender you need a copy of the loan’s PMI cancellation policies before you’ll sign the mortgage agreement.

“It’s the lender or whoever is going to service this loan who will make the rules on this,” Rodriguez says. “Your lender should know their servicing policy right upfront. If they say ‘No’ or ‘If’ or ‘Maybe’ and you call two other lenders and they say, ‘Absolutely, we would do that for you,’ you can vote with your feet.”

A previous version of this article incorrectly stated the loan-to-value ratios and years of ownership required to cancel private mortgage insurance based on a new appraisal. This article has been corrected.