Private Mortgage Insurance: What It Is and How Home Equity Can Affect It

If you bought your home with a conventional mortgage and put less than 20% down, you may still be paying private mortgage insurance, or PMI.

But PMI does not always stay on the loan forever.

As you pay down your mortgage, you build equity. If your home has also increased in value, you may have built even more equity than you realize. For some homeowners, that can create an opportunity to ask about PMI removal.

The important part is that increased value does not automatically mean PMI can be removed. Your mortgage servicer and the investor behind your loan determine the requirements.

What Is PMI?

Private mortgage insurance is commonly required on conventional mortgages when the buyer puts down less than 20%.

PMI protects the lender, not the homeowner, if the borrower stops making payments.

It is often included in the monthly mortgage payment, so removing PMI can lower a homeowner’s monthly housing expense.

Automatic PMI Removal vs. Requesting Cancellation

There are two different concepts homeowners should understand.

For many conventional loans covered by federal law, homeowners may generally request PMI cancellation when the mortgage balance reaches 80% of the home’s original value, assuming certain requirements are met.

PMI generally terminates automatically when the loan is scheduled to reach 78% of the original value, as long as the borrower is current.

The key phrase is original value.

Automatic PMI termination is not based on what your home may be worth today.

What If Your Home Has Increased in Value?

This is where things get more interesting for homeowners who purchased several years ago.  The value of your home may have increased enough, that your equity is high enough to request removal of PMI.

Imagine you bought a home for $300,000 and your remaining mortgage balance is now $260,000.

Based on the original purchase price, your loan-to-value ratio would still be about 87%.

But if the home is now worth $350,000, the estimated loan-to-value ratio based on current value would be closer to 74%.

That difference may give you a reason to contact your mortgage servicer and ask whether PMI cancellation based on current market value is available for your loan.

It does not guarantee approval.

Why PMI Removal Rules Can Vary

Your mortgage servicer is the company that collects your payment, but another company or investor may actually own the mortgage.

That could include Fannie Mae, Freddie Mac or another investor, each of which may have specific requirements.

Depending on your loan, PMI removal based on current value may depend on:

• How long you have had the mortgage
• Your payment history
• Your current loan-to-value ratio
• Whether you have other liens on the property
• The type of property
• The investor’s PMI cancellation guidelines

For example, Fannie Mae's current servicing guidelines generally require a lower loan-to-value ratio when a mortgage is only two to five years old than when it is more than five years old.

That is why simply reaching an estimated 20% equity does not necessarily mean PMI will come off.

Your Home's Value May Need to Be Verified

Online home estimates can be helpful for getting a rough idea of whether your property has increased in value, but they are not necessarily what your mortgage servicer will use.

Depending on the loan, the servicer may require:

• An appraisal
• A broker price opinion
• Another approved property valuation

The homeowner may also be responsible for the cost.

Before ordering your own appraisal, contact the mortgage servicer first. An appraisal you order independently may not meet its requirements.

A Simple Example of the Potential Savings

Suppose your monthly mortgage payment includes $125 in PMI.

If your servicer approves PMI removal, that could reduce your monthly housing expense by $125.

Over one year, that equals:

$125 × 12 = $1,500

Your principal, interest, taxes and homeowners insurance would not change just because PMI was removed, but eliminating one recurring expense can still make a noticeable difference.

FHA Mortgage Insurance Works Differently

This discussion applies primarily to conventional mortgages with private mortgage insurance.

FHA loans use mortgage insurance premiums, or MIP, and those rules are different.

For many newer FHA loans, mortgage insurance lasts either 11 years or for the life of the loan depending on the original loan-to-value ratio.

Home appreciation alone generally does not create the same PMI cancellation opportunity available with some conventional mortgages.

If you have an FHA loan, contact your mortgage servicer to find out what rules apply to your specific mortgage.

Could Your Bryan-College Station Home Value Be Worth Checking?

If you have owned your home for several years, you may have built equity through both mortgage paydown and changes in the local market.

That does not mean your PMI can automatically be removed, but it may be worth asking your mortgage servicer about your options.

A local REALTOR® can help you understand what similar homes are selling for and give you a clearer picture of current Bryan-College Station home values.

Your mortgage servicer still makes the final determination about PMI eligibility and any required valuation.

If you would like help getting a better idea of what your home may be worth today, reach out to Amber Romitelli with NextHome Realty Solutions BCS.

🏠 Here to help you find your happy place! 🧡
Amber Romitelli | REALTOR®
NextHome Realty Solutions BCS

Sources

Consumer Financial Protection Bureau: Private Mortgage Insurance and PMI Cancellation

Fannie Mae Servicing Guide: Termination of Conventional Mortgage Insurance

Freddie Mac: PMI Guidance

U.S. Department of Housing and Urban Development: FHA Mortgage Insurance Guidance