The Quick Read: The new loan has to come in at 80% or less of the home’s value, and that ceiling is the whole game. The new loan is your payoff, plus any closing costs you roll in, plus any cash back. Divide that total by the appraised value. At 80% or under, the new loan carries no mortgage insurance. Above 80%, the insurance stays unless you close the gap with cash.
Key Takeaways
- Mortgage insurance on a conventional loan depends on the new loan’s loan-to-value ratio (LTV), not on how long you have owned the home.
- The ceiling for dropping it is 80% of the value the lender uses.
- Everything financed counts toward that 80%: the payoff, rolled-in costs, and cash back.
- Rolling closing costs into the balance is the most common way a borrower lands just over the line.
- A low appraisal shrinks the ceiling. The same equity that looked fine on paper can come up short.
- A refinance is one route among several. Cancelling the insurance on your current loan can cost less.
Do You Have to Refinance to Drop Mortgage Insurance?
No, not always. Refinancing is one way to end mortgage insurance, but it is often not the more affordable one. Check the other routes first, then decide whether a new loan is worth its costs.
Refinance savings and break-even estimate
The starting figures are an example value with a balance in proportion and a placeholder for costs. Replace them with yours, and enter the current rate from your statement.
Editable benchmark: 7.32% as of October 22, 2026 · Freddie Mac 30-year average via FRED®. A conventional market reference, not a refinance quote.
Illustrative starting assumptions: a $350,000 home value, a $245,000 current balance, a current rate you enter and a remaining term seeded at twenty-five years, closing costs seeded at $5,000 as an editable placeholder (not a fee quote) and rolled into the new loan, a thirty-year term at the current Freddie Mac benchmark, and property taxes and insurance estimated at typical national rates. Every field is editable.
Illustrative estimate only — not a Loan Estimate, approval, quote, or commitment to lend. The new rate field carries the weekly Freddie Mac thirty-year conventional benchmark, a market reference and not a refinance quote; a refinance is priced by the lender at lock, and the current rate, the remaining term and the closing costs are figures you enter. The current payment is estimated from the balance, the current rate and the remaining term; the break-even divides the closing costs by the monthly saving and ignores the interest effect of a longer term. On the VA IRRRL the funding fee is added to the loan unless the veteran is exempt. Taxes and insurance are editable estimates. Licensed in sixteen states for consumer mortgages; Lendmire is a broker, never the lender.
| Route | What it needs | What it costs you |
|---|---|---|
| Request cancellation | Balance at 80% of original value, good payment history | Possibly a valuation |
| Automatic termination | Balance reaches 78% of original value, loan current | Nothing |
| Current-value cancellation | Seasoning, a valuation, servicer rules | Valuation fee |
| Refinance | New loan at 80% or less of value | Full closing costs, new rate and term |
The first two routes follow a schedule based on your original purchase value. The third lets a rising home value do the work, but servicers set their own conditions. A refinance replaces your whole loan: new note, new rate, new term. That is why it should be the last box you check, not the first.
For a wider look at when replacing a loan makes sense, see Lendmire's piece Is It Time to Refinance a Conventional Mortgage That Costs Too Much?.
PMI and FHA Mortgage Insurance Are Different Animals
Two products get lumped together online. On a conventional loan, the insurance is called private mortgage insurance (PMI). On an FHA loan, it is the FHA's own mortgage insurance premium, and its cancellation rules differ. Many FHA borrowers cannot simply cancel it and refinance into a conventional loan instead.
This article covers the conventional side.
How the Ceiling Works: The Formula
Maximum new loan = appraised value × 80%.
That is the entire formula. Mortgage insurance is a function of the new loan's LTV, so the question is never "how much equity do I have?" It is "does everything I want to finance fit under 80% of value?"
Across the wholesale programs Lendmire places files with, the standard rule matches what the agencies publish. Fannie Mae's Selling Guide requires mortgage insurance on a conventional first mortgage when LTV is above 80%. For a refinance, the value can come from an appraisal, an automated valuation, or another accepted method. Which method applies depends on the file and the underwriting findings. Lendmire arranges the loan; the lender decides.
What Counts Toward the Loan Amount?
The new loan is built from the bottom up. On a standard rate-and-term refinance, also called a limited cash-out refinance, the new loan may include:
- The payoff of your existing first mortgage, including accrued interest
- Closing costs, points and prepaid items you choose to finance
- Real estate taxes, within limits (seriously delinquent taxes cannot be rolled in)
- A second lien, but only if it was used to buy the home
- A small, capped amount of incidental cash back
Fannie Mae spells out these acceptable uses in its limited cash-out refinance rules. The key phrase is "only if it was used to buy the home." Pay off any other second lien and the loan becomes a cash-out refinance. That is not automatically fatal for dropping insurance, since cash-out is allowed up to 80% on a one-unit primary residence. But it brings its own seasoning rules, pricing adjustments and a different cap.
Here is how the pieces stack up on a typical file, expressed as a share of the home's value:
| Piece of the new loan | Share of value | Running LTV |
|---|---|---|
| Payoff of current loan | 76% | 76% |
| Financed closing costs | 3% | 79% |
| Incidental cash back | 0% | 79% |
At 79%, you are under the line. No mortgage insurance. Notice how little room is left: one percentage point.
Where Financed Closing Costs Break the Plan
Rolling costs into the balance feels free. It is not. Every financed dollar raises LTV, and LTV is the thing being tested.
Say a homeowner owes 78% of the home's value and wants to finance costs equal to 3% of value. The new loan lands at 81%. Insurance stays. Not what the homeowner had in mind.
There are four ways to close that gap:
1. Pay the closing costs out of pocket instead of financing them.
2. Pay down the principal at closing.
3. Finance fewer costs, for example by skipping optional prepaid items where the lender allows.
4. Accept the insurance and plan to cancel it later.
In this example, the homeowner needs to bring the loan down by just over one percentage point of value. Paying part of the costs in cash gets under 80%. A combination of options works too.
Honestly, this is a toss-up for many borrowers. Paying cash at closing keeps the loan insurance-free, but it ties up savings. Accepting insurance for a while keeps the cash but costs a monthly premium. The better move depends on how much cash you have and how long you expect to keep the loan.
What Happens If the Appraisal Comes in Low?
Your ceiling moves with the value. A lower value shrinks 80% of it, and your LTV jumps.
Take a borrower whose payoff and financed costs equal 76% of the value they expect. Watch what happens when the number the lender uses changes:
| Appraised value vs. expected | New loan as share of value | Mortgage insurance? |
|---|---|---|
| Matches expectation | 76.0% | No |
| 5% lower | 80.0% | No (right at the line) |
| 10% lower | 84.4% | Yes |
A five percent miss leaves this borrower sitting exactly on the line. A ten percent miss pushes the loan well over it. The same equity that qualified the borrower on paper falls short.
Run a cushion into your plan. If your math lands at 79% or 80%, a small appraisal miss will flip the result. If it lands in the low 70s, you have room.
Rate-and-Term vs. Cash-Out: Different Caps
Loan purpose changes the leverage cap. The Fannie Mae Eligibility Matrix sets maximum LTVs by transaction type, number of units and occupancy. On the programs Lendmire places, the picture looks like this:
| Transaction (primary residence) | Typical maximum LTV |
|---|---|
| Rate-and-term, one unit | 95% (97% in a narrow case) |
| Rate-and-term, two to four units | 95% |
| Cash-out, one unit | 80% |
| Cash-out, two to four units | 75% |
Two things follow. First, a rate-and-term refinance can go well above 80%, but anything above 80% carries mortgage insurance. So "can finance 95%" and "can drop mortgage insurance" are different questions. Second, a cash-out refinance on a one-unit primary residence tops out at 80%. That is why cash-out loans generally do not carry insurance. The cap sits right at the line.
Cash-out has seasoning rules too. The mortgage you are paying off generally must be at least 12 months old, and you must have been on title for six months, subject to exceptions for delayed financing, inheritance and legal awards. All of this is subject to lender guidelines and full file review.
One more case. A wholesale lane reaches 89.99% LTV with no mortgage insurance. It requires a 680 score, a 50% ratio ceiling, a thirty-year fixed rate, a primary residence, a conforming balance and six months of seasoning. It is not the same as an 80% loan with no insurance, because the structure is built differently and the terms differ. Compare it on the Loan Estimate, and note it is not written on Texas homestead cash-outs. Every figure here varies by lender and program — guidelines, property type, leverage, and credit profile all apply.
The 97% Option Keeps Insurance
It does not drop the insurance.
The 97% rate-and-term option gets confused with insurance removal. It is the reverse. Fannie Mae's guidance on its 97% LTV options limits it to existing loans that Fannie Mae owns, on a fixed-rate one-unit primary residence run through its automated underwriting system. Final terms depend on lender guidelines, property type, leverage, and the borrower's complete credit picture.
At 97%, you are 17 points above the no-insurance line. The option exists to lower the cost of an existing high-LTV loan, not to remove the insurance. Programs with income limits, such as HomeReady and Home Possible at 80% of area median income, also use different insurance coverage requirements.
Other Wrinkles Worth Knowing
Occupancy changes the math. The 80% line applies to a primary residence. If the property is a second home or rental, different leverage caps apply, so occupancy decides the answer.
Credit and ratios still apply. The wholesale conventional programs start at a 620 decision score. The automated finding governs most files, with a total debt ratio ceiling of 50%. Waiting periods after credit events, such as four years after a chapter 7 discharge or seven after a foreclosure, are agency rules.
Payment history matters twice. It affects refinance eligibility, and it affects any cancellation request on your current loan.
Lender-paid insurance is a different structure. It does not drop insurance; it moves the cost elsewhere. Look at the full terms on the Loan Estimate.
Refinance vs. Keep-and-Cancel: The Decision in Practice
Start with this question: can you cancel the insurance on the loan you already have?
The Consumer Financial Protection Bureau explains that borrowers can request removal once the balance is scheduled to reach 80% of the home's original value. The request is typically made in writing, with a good payment history and a certification that there are no junior liens. Insurance terminates automatically at 78% of original value if you are current. Ending it lowers your monthly cost.
A cancellation leaves your rate and term alone. A refinance does not. So the comparison runs like this:
1. Estimate monthly savings. Compare what you pay now with what you would pay on the new loan, with and without insurance.
2. Add up the costs. Include every closing cost, and note whether you will finance or pay it.
3. Account for the rest. A new loan resets your term and replaces your rate. Savings from dropping insurance can be erased by a worse rate or a longer term.
4. Divide. Total costs divided by monthly savings gives the break-even point in months.
5. Compare to your plans. If you expect to sell or move before break-even, the refinance loses.
A refinance wins when the insurance is large, cancellation is far off, and you plan to stay put. It loses when you are close to a cancellation threshold, or when your current rate is better than anything a new loan would offer. Lendmire's article Should an Overpaying Homeowner Refinance to Drop Mortgage Insurance? walks through that same break-even test.
When Equity Is Short
Suppose the numbers land just over 80%. You have three honest options.
Refinance anyway and cancel later. You pay insurance for a while, then request cancellation once your balance falls far enough. This works if the new loan's other terms beat your current loan.
Wait. Extra principal payments or a rising value can move you under the line without the cost of a new loan.
Skip it. If the savings do not clear the costs, keep the loan you have.
None of these is a failure. The goal is a lower total cost, not a refinance for its own sake.
What the Lender Will Look For
Every file goes through automated underwriting. Plan on these items:
- An appraisal or other accepted valuation
- A payoff statement for the current loan
- Income and asset documents, per the automated findings
- A 620 decision score at minimum on the wholesale programs, with some lenders setting a higher floor
- Proof the property is your primary residence
- For cash-out, the seasoning evidence described above
Loan Estimate and Closing Disclosure timing rules apply to this consumer loan, so you will see the costs in writing before you commit. Every parameter here is subject to lender guidelines and full file review, and none of it is a commitment to lend.
Key Terms Defined
Loan-to-value ratio (LTV): The new loan amount divided by the home's value. It is the number that decides whether mortgage insurance applies.
Private mortgage insurance (PMI): Coverage on a conventional loan above 80% LTV. It protects the lender, not you. These specifics are subject to lender guidelines and a full review of property, leverage, and credit.
Limited cash-out refinance: A refinance that pays off your first mortgage and costs, with only a small amount of cash back. Many people call it rate-and-term.
Cash-out refinance: A refinance that gives you more than incidental cash, with a lower maximum LTV.
Seasoning: The waiting period a lender requires, such as how long you have owned the home or held the loan.
Automated valuation model (AVM): A computer-generated estimate of value, sometimes accepted in place of a full appraisal.
Frequently Asked Questions
Does a refinance remove mortgage insurance automatically?
No. Only a new loan at 80% or less of value avoids it. A rate-and-term refinance can go up to 95% or 97%, and those loans keep insurance. Your payoff, financed costs and any cash back all count toward the 80%.
Can I take cash out and still skip mortgage insurance?
Yes, in a narrow window. A cash-out refinance on a one-unit primary residence is capped at 80%, so the loan ends up at or under the line. Two- to four-unit primary residences cap at 75%. Cash-out also carries seasoning rules and a different loan type.
Are financed closing costs counted toward the 80%?
Yes. Every financed dollar raises the loan amount and the LTV. If your payoff already sits near the line, paying costs in cash or paying down principal at closing can keep the loan under it.
What if the appraisal comes in low?
The ceiling shrinks with the value. A borrower at 76% of expected value lands at 80% if the value comes in 5% lower. At 10% lower, the loan sits well over the line. Build a cushion into your plan.
Is it cheaper to cancel mortgage insurance than to refinance?
Often, yes. Cancellation at 80% of original value leaves your rate and term unchanged and skips a new round of closing costs. Refinancing makes sense when cancellation is far off or when the new loan's other terms improve your situation.
If you are weighing a refinance and want the break-even run on your own numbers, Lendmire can help you compare the programs on the same home, starting with its conventional loan programs.
For your own numbers, request a scenario review with Lendmire.
About Lendmire
Lendmire (NMLS# 2371349) is a mortgage brokerage serving homeowners and home buyers in 16 states. FHA, VA, conventional and jumbo purchase and refinance loans are arranged through wholesale lending channels; Lendmire brokers the financing and the lender underwrites each application. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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References
1. Fannie Mae Selling Guide B7-1-01: Provision of Mortgage Insurance
2. Fannie Mae Selling Guide B2-1.3-02: Limited Cash-Out Refinance Transactions
3. Fannie Mae Eligibility Matrix
4. Fannie Mae FAQs: 97% LTV Options
5. CFPB: When can I remove private mortgage insurance (PMI) from my loan?
This article is part of Lendmire’s conventional loan program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: Should a Conventional ARM Holder Refinance Before the Adjustment? · Does a Lump-Sum Payment Lower Your Conventional Mortgage Payment? · Is It Time to Refinance a Conventional Mortgage That Costs Too Much?
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
- Mortgage Loan Originator · NMLS# 1129696 · Verify on NMLS Consumer Access
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- Lendmire LLC · Firm NMLS# 2371349 · Verify firm licensure
Compliance and disclosures. Lendmire (NMLS# 2371349) is a licensed mortgage broker and is not a direct lender, depository institution, financial advisor, or tax professional. Content in this article is general market analysis and educational information — not financial, legal, or tax advice for any specific situation. Lendmire does not guarantee loan approval; every transaction is subject to underwriting by the funding lender. Mortgage pricing and loan program guidelines are subject to change at any time without notice and vary by borrower characteristics, property type, and state regulations. Lendmire complies with Equal Housing Opportunity. Licensure verification: NMLS Consumer Access.