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How PMI cancellation works under the Homeowners Protection Act

Private mortgage insurance protects the lender when your down payment is under 20 percent. The Homeowners Protection Act of 1998 sets three dates for ending PMI. It covers only a mortgage on a single-family dwelling that is your principal residence (12 U.S.C. 4901(14) and (15)). Second homes and investment property are outside it. Under 12 U.S.C. 4901(2), the "cancellation date" is the date on which the principal balance—"based solely on the initial amortization schedule for that mortgage, and irrespective of the outstanding balance for that mortgage on that date, is first scheduled to reach 80 percent of the original value of the property securing the loan." Under 12 U.S.C. 4902(a), PMI is canceled on that date, or on any later date you meet all four requirements of section 4902(a). You submit a written request. You have a good payment history. You are current on your payments. And, under section 4902(a)(4), you satisfy any requirement of the loan's holder for two things. One is evidence that the home's value has not declined below its original value. The other is a certification that your equity is not encumbered by a subordinate lien, such as a second mortgage or a home equity line. Section 4901(4) defines a good payment history. You have no payment 60 days or more past due in the 12 months that start 24 months before the later of the cancellation date or your request. You also have no payment 30 days or more past due in the 12 months before that later date. In its PMI removal guide, the CFPB notes: "You can ask to cancel PMI ahead of the scheduled date, if you have made additional payments that reduce the principal balance of your mortgage to 80 percent of the original value of your home."

If you do not ask at 80 percent, section 4901(18) and section 4902(b) of that Act require the servicer to end PMI automatically on the "termination date." That is when the scheduled balance is "first scheduled to reach 78 percent of the original value of the property securing the loan," if you are current on that date. If you are not, PMI ends on the first day of the first month after you become current. Loans that carry high risk when they are made are excepted from the 80 and 78 percent rules (12 U.S.C. 4902(g)). A high-risk fixed-rate loan above the conforming loan limit ends at 77 percent instead. The midpoint rule below still applies to those loans (4902(g)(2)). For a purchase, section 4901(12) of the Act defines "original value" as "the lesser of the sales price of the property securing the mortgage, as reflected in the contract, or the appraised value at the time at which the subject residential mortgage transaction was consummated."

On the default $400,000 home with 10% down, 80 percent of the price is $320,000.00. The schedule hits that mark after month 95 (year 8). Next, 78 percent of the price is $312,000.00, reached after month 109 (year 10). Asking to cancel at month 95 stops PMI 14 months early and saves $2,100.00 ($14,250.00 paid instead of $16,350.00). Also, section 4902(c) of the Act sets a midpoint cap. If a high rate keeps the balance above 78 percent past the halfway mark and you are current, PMI must end on "the first day of the month immediately following the date that is the midpoint of the amortization period of the loan" (month 180 on a 30-year loan). On a $400,000 loan at 18% with 0% down, 78 percent LTV comes at month 260, so the midpoint cap ends PMI at month 180.

How your payment appears on the Loan Estimate and Closing Disclosure

After you apply, your lender gives you a Loan Estimate, whose contents 12 CFR 1026.37 sets. Page 1 shows a Projected Payments table. That table starts a new column whenever scheduled PMI drops off (12 CFR 1026.37(c)(1)(i)(C)). Under 12 CFR 1026.37(o)(4)(i)(A), principal and interest are shown to the exact cent. Monthly PMI and estimated escrow are rounded to the nearest dollar on the Loan Estimate, while the Closing Disclosure shows exact cents. On the default loan, Years 1–10 show $2,275.44 of P&I, $150 of PMI, and $550 of escrow, and Years 11–30 drop the PMI column.

Below Projected Payments, page 1 lists "Taxes, Insurance & Assessments" (12 CFR 1026.37(c)(4)(i)). Which charges count as assessments follows the definition in 12 CFR 1026.43(b)(8), so ask your lender whether your association dues are in that line. On page 3 under Comparisons, 12 CFR 1026.37(l)(1) shows the total paid in the first 60 months ($145,526 of P&I and PMI here, before loan fees). Right below that, 12 CFR 1026.37(l)(1)(ii) labels the principal reduced over 60 months as "Principal you will have paid off." On the default loan that is $23,000 (rounded from $23,000.11). Page 3 also shows the Total Interest Percentage (TIP) under 12 CFR 1026.37(l)(3). In its TIP guide, the CFPB explains: "The Total Interest Percentage (TIP) is a disclosure that tells you how much interest you will pay over the life of your mortgage loan." The comment to 1026.37(l)(3) says the creditor includes prepaid interest in that percentage. This page leaves prepaid interest out. On the default loan it shows 127.546%, and a Loan Estimate would print a slightly higher figure.

You can check this against the CFPB's sample Loan Estimate, Form H-24(B). Its cover states that the sample is "for the purchase of property at a sale price of $180,000 and has a loan amount of $162,000, a 30-year loan term, a fixed interest rate of 3.875 percent." Tax is $105.30 a month, insurance is $100.83 a month, and PMI is $81.95 a month. Those inputs match Form H-24(B)'s $761.78 of P&I, $82 of rounded PMI, and $206 of rounded escrow. Under 12 CFR 1026.37(o)(4)(i)(C), Form H-24(B) rounds the monthly total to $1,050 in Years 1–7 ($1,049.86 exact). In Years 8–30 it shows $968 ($967.91 exact) after PMI ends at month 80. Over 5 years, principal paid off is $15,773 ($15,772.58 exact).

Escrow cushions under Regulation X and lender cent rounding

Under Regulation X (12 CFR 1024.17(c)(1)(ii)), your servicer collects one-twelfth of your yearly tax and insurance bills each month. In its escrow guide, the CFPB explains: "An escrow account helps you pay these expenses because you send money through your lender or servicer, every month, instead of having to pay a big bill once or twice a year." The servicer may also hold a reserve cushion in your escrow account. Regulation X (12 CFR 1024.17(c)(5)) states that "The cushion must be no greater than one-sixth (1/6) of the estimated total annual disbursements from the escrow account." One-sixth of a year is two months of escrow payments. On the default $6,600 of yearly tax and insurance ($550.00 a month), the two-month cushion limit is $1,100.00.

Why does the last payment on a lender schedule differ by a few dollars from the first 359 payments? Regulation Z comment 17(c)(3)-1 notes that "the amount of the last payment may require adjustment to account for the rounding of the other payments to whole cents." On the default loan at 6.5%, the unrounded payment is $2,275.44488, which rounds down by about 0.49 cents each month. Over 359 months those fractions add up. Payment 360 is $2,281.04 ($5.60 higher), and total interest is $459,164.00 instead of the unrounded $459,160.16.

Comparing 20% down vs PMI and 15-year vs 30-year terms

Putting 20 percent down ($80,000.00) instead of 10 percent on the default $400,000 home takes $40,000.00 more cash at closing. In return, your loan drops to $320,000.00 and PMI is eliminated. Your monthly payment falls to $2,572.62, saving $402.82 a month while PMI would have run and $252.82 a month after. Over 30 years, 20 percent down saves $51,023.36 of interest and $67,373.36 including PMI.

Moving from a 30-year term to a 15-year term speeds up both payoff and PMI removal. The CFPB's loan options page notes that on a shorter term, the rate "is usually lower—by as much as a full percentage point." On the default loan at 6.5%, a 15-year term raises the payment by $860.55 to $3,835.99. Automatic PMI ends at month 37, saving $10,800.00 of PMI, and total interest falls by $254,686.84 to $204,477.16. At 5.75% over 15 years, the payment is $3,689.48, PMI ends at month 35 ($5,250.00 total PMI), and interest is $178,105.30.