PMI, and the Day It Goes Away

The video above covers this in two minutes, and it is on its way. This is the written companion to it — the same subject with room for the arithmetic.

Look at a mortgage statement and there is usually a line most people cannot account for. Not principal, not interest, not taxes, not homeowners insurance. A separate charge, often a few hundred dollars a month, apparently buying nothing.

That is private mortgage insurance, and the good news is the part almost nobody knows: on most conventional loans it is temporary, and the date it has to stop is written into federal law rather than left to the lender.

What PMI Is, and Who It Actually Protects

Private mortgage insurance is an insurance policy on a conventional loan that pays the LENDER if you stop paying. You buy it, you pay for it every month, and it covers somebody else. That is not a scandal — it is the trade that makes a small down payment possible at all — but it is worth being clear about, because it explains everything else in this article.

It is generally required when you put down less than 20%, and the rate is priced per borrower rather than set by a schedule. Credit score and down payment do most of the work: at a score around 640 with 5% down, PMI commonly runs about 1.15% of the loan a year according to The Truth About Mortgage, while at 760 and above ConsumerAffairs reports it can fall to around 0.46%.

You are not paying for protection. You are paying for permission to buy before you have twenty per cent.

That framing is why the credit tiering behind the rate matters so much: two borrowers on identical loans can pay very different amounts for the identical permission.

The Two Ways It Ends, Both Written Into Federal Law

The Homeowners Protection Act sets the rules, and the Consumer Financial Protection Bureau publishes the plain-language version of them. There are two routes and one backstop.

• You ask, at 80%. Once the balance is scheduled to reach 80% of the home’s ORIGINAL value, you may request cancellation in writing. This is the one you have to act on — it does not happen by itself.

• It stops by itself, at 78%. When the balance reaches 78% of the original value, the servicer must terminate it automatically, whether you asked or not, provided you are current on the loan.

• The midpoint backstop. If for some reason you have still not reached 78% by the halfway point of the loan’s amortisation schedule, the servicer must terminate it anyway on the first day of the following month, again provided you are current.

Note what "original value" means, because it is the detail that trips people up: it is the lower of the purchase price or the appraised value at the time the loan was made. Under these two rules, the house going up in value does nothing on its own — the balance has to come down.

The Arithmetic on a $350,000 House

Percentages of an original value are abstract until they are dollars. Here is the same $350,000 house this library keeps coming back to, bought with 5% down.

A $350,000 purchase with 5% down — the two thresholds, in dollars:

Original value

$350,000

Starting balance

$332,500

Request at 80%

$280,000

Automatic at 78%

$273,000

See how fast your own balance falls

So the buyer starts at $332,500 and has to retire $52,500 of principal to earn the right to ask, and $59,500 for the charge to stop on its own. On an ordinary thirty-year payment schedule that is years of work rather than months — early payments are mostly interest — which is why the section below matters more than the rules above.

The rules tell you when it can end. Your amortisation schedule tells you when it will.

The Conditions Attached to Cancelling

Reaching the number is necessary and not always sufficient. A request at 80% generally has to clear a short list:

• The request is in writing. A phone call is not the mechanism.
• Your payment history is good — the law allows a servicer to refuse where it is not.
• There is no second lien on the property. A home equity line taken out behind the first mortgage can block it.
• The servicer may require evidence the value has not fallen, which in practice can mean paying for a new appraisal.

None of that applies to the automatic termination at 78%, which happens on the schedule regardless of whether you asked — but it does require you to be current, which is the one condition that survives everywhere in this subject.

Getting There Years Sooner

Three routes, in rough order of how much control you have over them:

• Pay extra principal. The thresholds are about the BALANCE, so anything that reduces it early brings the date forward. Because early payments are so interest-heavy, a modest extra amount in the first years moves the date a surprising distance.

• Ask about appreciation. Separately from the federal rules above, servicers and investors often have their own policy for recognising a higher CURRENT value, usually on a new appraisal you pay for. It is not an entitlement — it is a question worth asking your servicer, and the answer varies.

• Refinance out of it. If the house has genuinely gained value and you now have 20% equity at today’s numbers, a new loan can simply have no mortgage insurance on it. Whether that is worth doing depends entirely on what happens to your rate.

FHA Insurance Is a Different Animal Entirely

Everything above is about PMI on a conventional loan. An FHA loan carries a mortgage insurance premium instead, and it does not follow these rules. Where the down payment is under 10%, the annual premium runs for the life of the loan — reaching 20% equity changes nothing, and the only way out is refinancing into a different loan, which is worth pricing against the premium you would stop paying rather than assumed either way.

The other two major programs are different again. A VA loan carries no monthly mortgage insurance at all for an eligible borrower, and a USDA loan charges an annual guarantee fee in its place. Our FHA versus conventional comparison prices the first two against each other on this same house.

On a conventional loan the insurance has an end date. On an FHA loan with a small down payment, it usually has a refinance.

Two Variants That Behave Differently

Not every conventional loan carries PMI as a monthly line, and the alternatives change what "when does it end" even means.

• Lender-paid mortgage insurance. The lender buys the policy and charges you through a higher interest rate instead. There is no monthly insurance line to cancel — the higher rate stays for the life of the loan, so it can only be escaped by refinancing.

• Single-premium mortgage insurance. One lump sum at closing, paid in cash or financed into the loan, rather than a monthly charge. Whether it beats monthly PMI depends on how long you keep the loan.

Both can genuinely be the cheaper answer, and neither is obviously so. Ask a loan officer to price the monthly, lender-paid and single-premium versions of the same loan side by side, over the number of years you actually expect to keep it. That is the comparison — not the rate on its own.

And if you are already paying PMI on a conventional loan today, the single most useful thing you can do this week is find out what your balance actually is against 80% of the original value. Most people are closer than they think.

This content is for educational purposes only and is not a commitment to lend. The cancellation and termination thresholds described here come from federal law and apply to most private mortgage insurance on a primary residence; the insurance rates shown are published averages rather than quotes, and vary by borrower, program and lender. All figures shown are examples and every loan is subject to credit approval and program guidelines. Alliance Lending Services, NMLS #304510. Equal Housing Opportunity.