How do I cancel my mortgage insurance?
When your loan reaches an 80 percent LTV level, you can request that your mortgage insurance be cancelled. You must do this in writing. However, cancellation at this point is still done on a voluntary basis by the lender; it's not legally required until the 78 percent paydown level is reached. However, the law does require that lenders have a policy in place to cover such requests, and that they must respond to your request within in a reasonable time.
An 80 percent cancellation can be granted if you've made your payments on time, have no other loans against the property (a home equity loan or line can hinder you), and your property value has not declined. Generally, you'll need to provide proof in the form of an appraisal or Broker Price Opinion (more on how-to later).
If your loan is held by Fannie Mae, their interpretation of the borrower-initiated cancellation procedure is this:
"For a first mortgage secured by a one-family principal residence, the LTV ratio (determined by outstanding balance against appraised value) must be 75% or less if the seasoning (age) of the mortgage is between two and five years, and 80% or less if the seasoning is greater than 5 years."
Translation: You can cancel the PMI on your Fannie Mae mortgage even before you've paid down very much -- if home-price appreciation in your area has been strong. If you put 10 percent down for your purchase a year ago, and home prices are rising quickly, you might reach the cancellation point faster than you might think. However, to cancel your MI before a five-year period has elapsed, though, you will need to be at a 75 percent -- not 80 percent -- LTV.
As many mortgages seek to conform to Fannie-type regulations, it's likely that most lenders and servicers will follow them. But don't just assume that it will apply to you, especially if you closed your loan before July 29, 1999. Check your mortgage paperwork.
Some mortgages exempt
Note that these guidelines are for "standard" mortgages. Loans classified as "high-risk," or with unusual underwriting qualities, may have to wait until the 77 percent paydown noted in the law before requesting cancellation. For some loans, this means that automatic cancellation won't happen until the mid-point of the original payoff schedule.
What's "high risk"? It's hard to say, since no definition was provided in the law and Fannie didn't offer one in their interpretive statement (Fannie Mae announcement 99-06). At the time, Fannie didn't choose to exclude any loans it controls, but may do so in the future.
How to write a MI cancellation letter
According to the law, a borrower may request cancellation of PMI, but must do so in writing. Here's a sample of a mortgage insurance cancellation letter:
My Mortgage Corporation
April 1, 2013
I am writing to request the cancellation of the Private Mortgage Insurance (PMI) policy attached to my mortgage.
As you are aware, Federal law allows for the cancellation of PMI when certain LTV ratios are met through the normal amortization of a mortgage, or amortization coupled with market appreciation.
(Note: Use the following paragraph if your loan was originated after August 1999)
Although the Homeowner's Protection Act of 1998 calls for the automatic cancellation of PMI when a 78% LTV ratio has been reached through normal amortization, I also understand that I may request cancellation of my PMI when I have passed an 80% LTV threshold.
(Note: Use the following paragraph if your loan was originated before August 1999)
I am aware that my mortgage was originated before August 1999, and that automatic cancellation of PMI is not applicable to my mortgage. However, I also understand that I may request cancellation of my PMI when I have passed an 80% LTV threshold.
I believe that through regular payments and favorable market conditions that I have passed that mark, and therefore should be able to cancel the PMI on my loan. I believe that my payment history also meets appropriate requirements.
Please advise me of the procedures for doing so at your earliest convenience. I look forward to your prompt reply.
Once cancellation occurs
Depending upon which method of payment was selected for your mortgage insurance, you may be entitled to a refund for any unused premium. It may be as much as a full year's premium. If your premium is part of your monthly mortgage bill, the payment you send to your servicer each month should decrease by the amount of the MI premium.
The last word
If you're not a candidate for automatic cancellation, if your payment history is suspect, or if you just hate writing letters, you might still be able to cancel your PMI by the tried-and-true method: refinancing.
If your home has appreciated and your loan balance has declined, and market conditions are favorable for refinancing, you could simply get a new mortgage that doesn't require PMI in the first place. In fact, this may happen all by itself, even if you're refinancing for a completely different reason, and it’s certainly a sure way to rid yourself of unneeded mortgage insurance.