Putting less than 20% down on a conventional mortgage usually means paying private mortgage insurance (PMI). It protects the lender, not you, and it adds to your monthly payment. The good news: on most conventional loans, federal rules say when it has to stop.
Here are the three rules, as the Consumer Financial Protection Bureau (CFPB) explains them.
Rule 1: You can ask to cancel at 80%
Once your principal balance is scheduled to reach 80% of your home's original value, you can ask your servicer, in writing, to cancel PMI. If you've made extra payments, you can ask as soon as your balance actually reaches 80%.
The servicer has to grant it if you:
- are current on payments and have a good payment history,
- certify there's no second mortgage or other junior lien, and
- show, typically with an appraisal, that the home's value hasn't fallen below its original value.
"Original value" generally means the lower of what you paid and the appraised value when you bought. After a refinance, it's the appraised value at the refinance.
Rule 2: It ends automatically at 78%
You don't have to ask for this one. Your servicer must end PMI on the date your balance is scheduled to reach 78% of the original value, as long as you're current on payments. If you're behind, it ends shortly after you catch up.
Rule 3: It ends at the midpoint of the loan
Even if your balance hasn't reached 78%, PMI must end the month after the midpoint of your loan's amortization schedule: 15 years into a 30-year loan, as long as you're current.
Which loans these rules cover
These rules apply to mortgages on a single-family principal residence that closed on or after July 29, 1999. FHA and VA loans have their own requirements, and so do loans where the lender pays the mortgage insurance. Fannie Mae and Freddie Mac may set their own cancellation rules, but those can't be less favorable to you than the federal ones.
How to get there sooner
- Extra principal payments bring the 80% date closer, and you can ask as soon as you reach it.
- Rising home values don't count toward the federal 80% and 78% rules, which use the original value. Some lenders and investors will cancel based on a new appraisal under their own policies, so ask your servicer.
- Refinancing resets the original value to the new appraisal. That can end PMI if your home has gained value, though a refinance has its own costs, and at 7%+ rates it rarely makes sense for this alone.
Is it worth putting 20% down to avoid PMI?
Not always. Waiting years to save 20% can cost more than PMI if prices and rents rise in the meantime, and less if they're falling. Starter home now or wait and save? works through that trade-off, and the home value forecast by city shows which way prices are moving in 30 cities. For a specific ZIP, use Predictye Property.
Source
- Consumer Financial Protection Bureau, "When can I remove private mortgage insurance (PMI) from my loan?" These rules come from the federal Homeowners Protection Act. Check your servicer's amortization schedule for your exact dates.
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