Under Federal legislation passed in 1999, private mortgage insurance is cancelled automatically at some point, but borrowers who take the initiative may be able to terminate earlier than those who wait. For the background to this legislation, see Cancelling Private Mortgage Insurance (1).

Mortgage Insurance Termination Rules

Under one provision of the 1999 law, lenders are required to cancel private mortgage insurance on most home mortgage loans made after July 29, 1999. Cancellation will occur automatically when amortization has reduced the loan balance to 78% of the value of the property at the time the loan was made.

But under another provision of this law, lenders must terminate insurance at the borrower’s request when the loan balance hits 80% of the original value. Borrowers who take the initiative can thus terminate earlier.

Warning: The lender need not accept your request for cancellation if:

• You have a second mortgage.
• The property has declined in value.
• You had a payment late by 30 days or more within the year preceding the cancellation date, or late by 60 days or more within the year preceding the cancellation date, or late by 60 days or more in the year before that.

Time to Termination

Because termination is based on original rather than current value, the wait can be a long one. With normal amortization, it takes 142 months for the loan balance on a 8% 30-year loan equal to 95% of property value, to fall to 80%. A 15-year loan that is otherwise identical will get there in 47 months.

However, borrowers who add to their regular monthly payment will reach the 80% target more quickly. If they add 1/12 of the payment every month — for example, a $600 payment is raised to $650 — the mortgages cited above will hit the 80% target in 91 months and 38 months, respectively.

If your loan was made before July 29, 1999, you are not covered by the 1999 law. If you were lucky enough to have your loan sold to Fannie Mae or Freddie Mac, however, you are subject to the cancellation rules of the agencies regardless of when the loan was made.

Mortgage Insurance Termination Rules of Fannie Mae and Freddie Mac

The agencies’ rules are more favorable to homeowners because they are based on the current appraised value of the property rather than the value at the time the loan was made.

Under these rules:

• You can terminate after two years if the loan balance is no more than 75% of current appraised value, and after 5 years if it is no more than 80%.
• You must request cancellation, and obtain an appraisal acceptable to the agencies and to the lender.
• The ratios required for termination are lower if there is a second mortgage, if the property is held for investment rather than occupancy, or if the property is other than single-family.
• The agencies will not accept termination if your payment has been 30-days late within the prior year, or 60-days late in the year before that.

Using current value rather than original value can substantially shorten the period to termination. For example, the 30-year 8% loan that takes 142 months to reach 80% of original value, will get there in 96 months with just 1% annual appreciation, and in 53 months with 3% appreciation.

If your loan was made before July 29, 1999, and if it is not held by Fannie or Freddie, the termination rules that apply are those of your lender. In some states (California, Connecticut, Maryland, Minnesota, Missouri, New York, North Carolina, Oregon, Texas and Virginia), lenders’ rules may be affected by state law.

Developing Your Mortgage Insurance Termination Strategy

The best strategy is to assume you are subject to the liberal Fannie/Freddie rules. After 2 years, begin periodically to estimate the current value of your house. Web sites offering tools that can help include Zillow, Redfin, eppraisal, and forsalebyowner.com . Simple explanations of how these sites work can be found in Randy Johnson’s excellent book, “How to Find a Home and Get a Mortgage on the Internet.” Then you can use my calculator 4a, How Long Before Mortgage Insurance Terminates.

When it appears that you might meet the agencies’ requirements, contact your lender and ask whether your mortgage is held by one of the agencies. If it is, confirm the ratio of balance to current value that permits termination in your case, and ask about acceptable appraisers.

If your loan isn’t held by one of the agencies, ask the lender for a written statement of its own termination policy. If your loan was made after July 29, 1999, follow the more liberal of the lender’s rules or the Federal law. If your loan was made before July 29, 1999, you are stuck with the lender’s rules.

But don’t accept rules substantially less liberal than those of Fannie/Freddie without protest. Let the lender know that so long as you are forced to pay for insurance that Fannie Mae and Freddie Mac say isn’t necessary, the lender need not try to cross-sell you anything else.

NOTE: If you have an FHA mortgage, the termination rules are different; please stand by for a follow-up article on FHA mortgage insurance issues as well as PMI cancellation rules for multi-family properties.