When can I stop paying for mortgage insurance?

You can typically stop paying for mortgage insurance once your loan is paid down to 78 percent of the home's original value. In theory, your PMI policy should automatically cancel when you've reached a 78% loan-to-value ratio, but there are situations where it could take somewhat longer or even a considerably shorter period than that.

The fact is, mortgage insurance didn’t always automatically cancel, and borrowers didn’t always know they could cancel it, either. Way back in the early and mid-1990s, millions of homeowners came out to refinance loans and discovered that they'd been paying for mortgage insurance long after their growing home equity and regular amortization made it unnecessary.

While they may have been happy to discover they no longer needed MI, many were not pleased that there was no mechanism in place to notify them that they no longer needed it -- let alone some way to cancel it. While some lenders did allow borrowers to challenge the need for MI, for many the only way out was to refinance into a new mortgage.

PMI Cancellation Law

These unhappy homeowners found an ally in Jim Hensen, a Utah congressman who had his own problems canceling PMI on his Beltway condo. His travails led to the eventual passage of the Homeowner Protection Act (HPA).

Made law in 1998 and effective in July 1999, HPA mandates annual notification to eligible borrowers that their policy can be cancelled. It also spells out the conditions under which a PMI policy can be cancelled automatically -- typically, when the original loan balance is paid down to 78 percent of the original value of the home, based upon the original payment schedule. However, this sunset provision covers only those loans originated after July 29, 1999. Earlier loans have no such automatic cancellation.

Related: What's your home worth today?

Of course, this doesn’t apply to delinquent borrowers.  With a less-than-stellar payment history, especially in the last year or two, you may have to wait a while. The law states that in the 12 months leading up to the automatic cancellation, the borrower can have no payments which were more than 30 days overdue. In addition, in the past 24 months leading up to the auto-cancel, the borrower can have no payments which were 60 or more days past due.

If there are late payments in the borrower's payment history, they will have to wait until consecutive "late-free" periods are built, or until the loan is paid down to a 77 percent LTV level.

However, there has always been an informal borrower-lender relationship with regards to PMI cancellation, provided you knew you had PMI and were aware that it could be cancelled at some point. If you didn't, you simply paid PMI until you refinanced or the loan was paid off. Now, however, HPA requires that at least once per year, the lender must notify you that your PMI may be cancelled, provided certain conditions are met. This applies to single-family principal residences only.

How Long Do You Pay Mortgage Insurance?

How long you'll pay mortgage insurance depends on several factors. For Private Mortgage Insurance used with conventional loans, the usual determining factors are how large a down payment you made (or how much equity you have) and what happens to the value of your home in the future.

While the loans's 78% LTV level is where cancellation of mortgage insurance is automatic in most cases, it's also possible that private mortgage insurance can be cancelled voluntarily by the lender when your loan reaches 80% LTV, provided you've made payments on time and had your loan for several years. How long you'll pay for mortgage insurance often depends on one thing, though: How large of a down payment you make when you buy your home.

If you start with a larger downpayment -- say, 15% rather than 5% -- the time period where you'll pay mortgage insurance may be fairly short, likely around 5 years. However, start with only a 5% down payment and it will take about 8 years to make it to an 80% LTV level (and close to 9 years to hit the 78% LTV automatic cancellation point).

What shortens either of these time periods is home price appreciation. Along with making regular principal payments, rising home prices lower your loan-to-value ratio, shortening the length of time where private mortgage insurance will be required on your loan. You can also affect how long you'll pay mortgage insurance by making prepayments on your mortgage, lowering the amount owed more quickly.

There are different kinds of mortgage insurance policies (such as Lender-Paid Mortgage Insurance) that cannot be cancelled. As well, mortgage insurance on FHA loans made after June 2013 that began with less than 10% down payment can also not be cancelled; FHA loans with a 10% down payment or more can be cancelled after 11 years have passed. "Funding fees" for VA or USDA loans are technically one-time mortgage insurance premium payments but the coverage is actually built into the loan and so cannot be cancelled.

Getting to 78% LTV: Amortization and appreciation

Two factors work in your favor when it comes to building enough equity to cancel your PMI:

1. Amortization -- the process of paying off your mortgage -- is a slow, steady, but guaranteed process
2. Appreciation (a.k.a home price inflation), however, is a fickle, unpredictable process which can quickly bring gains in an active housing market, but can also cost you equity in periods of economic downturns

How long will it take to get to an 80 percent LTV ratio, through amortization alone? Simply put, it will take years.

As an example, a $90,000 loan ($100,000 purchase price, i.e. 10 percent down) with a 30-year term at 4 percent results in a monthly payment of $477.42. (Note: the higher your loan’s interest rate is, the longer it will take to reach the 80 percent LTV level).

In the early years of your mortgage, most of your payment is comprised of interest, so you barely make a dent in the principal you owe.

You won't reach a remaining balance of $80,000 (80 percent LTV) where you can request cancellation of your MI until the 69th payment, late in the fifth year. Amortization is truly the slow and steady way to build equity. For a 15-year term, the period is cut to less than three years, since you’re paying down the outstanding principal much faster.

However, inflation/appreciation can greatly accelerate your equity stake. Compare the amortization above with 1 percent price appreciation to see how much more quickly you'll get to 80 percent:

With just 1 percent appreciation and regular, timely payments, you might be able to cancel your PMI as early as the end of year four, instead of somewhere in the fifth year. Of course, greater levels of appreciation speed up the process, and declining home values in your area would prolong it.

Related: How much equity do you have in your home now?

How soon can I cancel my mortgage insurance?

Our interpretation of the HPA law -- and Fannie Mae's position -- is that a borrower holding a loan with less than two years of seasoning and solid payment history would find it difficult, if not impossible, to have their PMI cancelled, regardless of local market appreciation, unless they have significantly accelerated their payments in some way -- by prepaying, for example, or in an instance where the homeowner has done a considerable amount of home improvement – and even then will need to be at a 75 percent LTV ratio, verified by a full appraisal of the property.

If you’re interested in the full, actual text of the HPA law, you can find a copy on the FDIC’s website at http://www.fdic.gov/news/news/inactivefinancial/1999/useftp.pdf-- but a fairly plain-language version can be found in the FDIC’s compliance manual at https://www.fdic.gov/resources/supervision-and-examinations/consumer-compliance-examination-manual/documents/5/v-5-1.pdf -- where all of the rights and responsibilities of the lender or servicer are spelled out.

Related: How do I cancel mortgage insurance?