What This Guide Covers
- Automatic vs requested PMI cancellation on conventional loans and the LTV thresholds
- Why FHA loans originated after June 2013 have permanent MIP that cannot be removed
- How to calculate whether refinancing from FHA to conventional eliminates MIP profitably
- Lender-paid mortgage insurance (LPMI): why it sounds good and why it usually is not
How Mortgage Insurance Cancellation Works by Loan Type
Mortgage insurance reduces lender risk on high-LTV loans. The rules for removing it differ completely between conventional loans and FHA loans, and borrowers who do not understand this distinction can pay tens of thousands of dollars in unnecessary MI premiums.
Conventional PMI is governed by the Homeowners Protection Act of 1998. Borrowers have two cancellation paths: automatic and requested. Automatic cancellation occurs when the loan balance reaches 78% of the original purchase price based on the scheduled amortization. The servicer must cancel PMI automatically at this point without any borrower action required. Requested cancellation can occur when the borrower demonstrates that the current loan balance is at or below 80% of the current appraised value, provided the loan is at least two years old for value-based requests. A new appraisal is typically required.
FHA mortgage insurance premium (MIP) follows a completely different set of rules. For FHA loans originated on or after June 3, 2013, with a down payment below 10%: MIP is permanent for the life of the loan. There is no cancellation provision. The only way to eliminate MIP on these loans is to refinance out of FHA into a conventional or other non-MIP loan product. For FHA loans with 10% or more down payment originated after June 2013: MIP runs for 11 years, then cancels automatically.
For FHA loans originated before June 3, 2013: MIP cancels when the LTV reaches 78% based on the original purchase price. These older loans have a more favorable MIP structure than post-2013 FHA loans.
Required Documentation
- ✓For conventional PMI cancellation: written request to servicer, evidence of on-time payment history (no 30-day lates in the past 12 months), and property appraisal if requesting based on current value
- ✓Current mortgage statement showing loan balance and original loan amount
- ✓Original appraisal or sales price documentation to calculate LTV
- ✓For FHA to conventional refinance: income documentation for the refinance qualification, new appraisal showing current value and 80%+ equity
What Most Lenders Get Wrong
- 1.Not informing FHA borrowers that their MIP is permanent when they originate. This is a material disclosure issue. A borrower who understood MIP would run for the loan's life may have made a different decision about FHA vs conventional at origination.
- 2.Telling borrowers they can cancel FHA MIP based on LTV without checking the origination date. Pre-2013 FHA loans do have cancellation provisions. Post-2013 loans do not. Applying the wrong rules leads to incorrect advice.
- 3.Not modeling the refinance break-even for FHA borrowers approaching 20% equity. If a borrower can refinance from FHA with MIP to conventional without MIP and the monthly savings exceed the refinance closing costs within a reasonable break-even period, the refinance likely makes financial sense.
- 4.Recommending LPMI (Lender-Paid Mortgage Insurance) without explaining that the higher rate associated with LPMI cannot be eliminated. Unlike borrower-paid PMI which can be cancelled, the higher rate from LPMI is permanent for the life of that loan.
The Conventional PMI Cancellation Process in Detail
For borrowers with conventional loans and PMI, eliminating the premium requires reaching either the 78% automatic cancellation threshold or the 80% requested cancellation threshold.
The automatic path is passive: when the scheduled amortization of the loan reduces the balance to 78% of the original purchase price, the servicer is required by law to cancel PMI and notify the borrower. This happens based on the amortization schedule, not based on any action the borrower takes. The timeline depends on the original down payment and interest rate; on a 30-year loan with 5% down, automatic cancellation occurs around year 11 in a flat-value environment.
The requested path at 80% LTV is more flexible. A borrower who has made significant principal payments, or whose home has appreciated, can request PMI cancellation before the automatic threshold is reached. The key requirements are: the loan must have a satisfactory payment history (typically no 30-day lates in the past 12 months and no 60-day lates ever), a current appraisal showing at least 20% equity, and the loan must have been in place for at least two years if using current value rather than original purchase price.
For Kern County borrowers who purchased in 2020 through 2022 during the peak appreciation period, property values may have increased enough to push equity well above 20% even after subsequent moderation. A current appraisal can confirm this, and if the numbers support it, requesting PMI cancellation now eliminates the monthly cost without a refinance.
The FHA to Conventional Refinance: When It Pays to Make the Switch
The refinance from FHA to conventional is the only way to eliminate MIP from a post-2013 FHA loan. The decision to refinance should be based on a break-even analysis, not just the desire to eliminate MIP.
The calculation: monthly MIP eliminated minus any increase in principal and interest payment due to rate difference, minus the monthly cost of financing the refinance closing costs, equals monthly net savings. Divide the total closing costs by the monthly net savings to arrive at the break-even in months.
Example: A borrower has a $320,000 FHA loan at 3.5% with a monthly MIP of $220. Current conventional rates are 7%. Refinancing to conventional eliminates the $220 MIP but increases the P&I payment by approximately $1,100 per month (from a low 3.5% rate to 7%). In this case, the refinance is deeply negative: the borrower loses more in rate than they gain by eliminating MIP.
Contrast this with a borrower who purchased in 2024 at a 6.75% FHA rate with $220 monthly MIP. If conventional rates are also 6.75% and the borrower now has 20% equity due to appreciation, refinancing to conventional at the same rate eliminates the $220 MIP with minimal closing costs. Monthly savings of $220, break-even in roughly 6 to 8 months depending on closing costs. This refinance makes clear sense.
The rule of thumb: the FHA to conventional refinance makes sense when the rate difference between the two loans is small and the MIP savings are large relative to the refinance cost.
Every FHA borrower I work with gets a clear explanation at origination about whether their MIP is permanent. This is basic informed consent that the borrower deserves. Then I put them on a calendar to review their equity position 24 months after closing, because that is when many borrowers hit the 20% equity threshold if they made their normal payments and the market cooperated. The borrowers who save the most are the ones who know to ask.
Do you want to know if you can eliminate mortgage insurance from your current loan?
Call Dan at (661) 342-9381. He will review your specific situation and documentation in a free call.