Question: We pay a hefty amount each month for mortgage insurance. Paying down principal would be a much better use of our cash. How do we get rid of mortgage insurance coverage?
Answer: If you finance real estate with at least 20 percent down you don’t need mortgage insurance. However, most people buy with less up-front. In that case, they’re required by lenders to buy this financial product.
What do you get for your mortgage insurance money? You get the right to buy with little down. This means you can buy today without waiting years to accumulate huge savings. Because you can buy now you can buy at today’s prices, a good thing if prices rise in the future.
What’s in it for the lender? If you don’t pay your mortgage and the property is foreclosed the lender has a claim again the mortgage insurance program for some or all of any loss.
How To Cancel Mortgage Insurance
The general rules for canceling mortgage insurance depend on your mortgage.
First, with conforming loans that can be sold to Fannie Mae and Freddie Mac you can request private mortgage insurance (PMI) cancellation “when you have reached the date when the principal balance of your mortgage is scheduled to fall to 80 percent of the original value of your home,” according to the Consumer Finance Protection Bureau (CFPB).
Just remember that a “request” is a plea for help. The lender can say no.
Second, with conforming loans your servicer “must automatically terminate PMI on the date when your principal balance is scheduled to reach 78 percent of the original value of your home,” the CFPB explains. Notice that if the value of your home goes up and has tons of extra equity it doesn’t matter. The lender is only required to look at the loan schedule.
Third, with new FHA and USDA 30-year financing the mortgage insurance premium (MIP) lasts for the life of the loan.
Fourth, with VA financing there is no mortgage insurance to cancel because there is no annual fee.
General Rules To Cancel Mortgage Insurance May Not Count
While the general rules seem pretty clear they actually hide a lot of complexities. For example, the lender must cancel mortgage insurance for a conforming loan once the debt is scheduled to be reduced to 78 percent of the original value of your home. In practice, this means most borrowers will never have their mortgage insurance payments canceled.
If you buy a home for $200,000 with 5 percent down then you will borrow $190,000. At 4.25 percent interest, the mortgage balance is not scheduled to reach $156,000 – 78 percent of the home’s original value – until month 127. That’s more than 10 years from now.
According to ATTOM Data Solutions homes on average were sold after 8.18 years of ownership in the third quarter. In other words, most borrowers will have sold the property long before mortgage insurance can be canceled.
Cancellation hurdles
Cancellation is not automatic once the scheduled 78 percent benchmark is reached. The rules say you must have a written cancellation request. You must have a good payment history. Can can’t have a junior lien such as a home equity line of credit (HELOC). The property value must be equal to or greater than the original sale price. The lender can require that you to prove current value by demanding an appraisal – at your cost.
The mid-point exception
Once you meet the loan’s midpoint a conforming lender must end PMI coverage but only if payments are current. For a 30-year mortgage this means 15 years must pass. Once again the home will probably be sold long before the midpoint is ever reached.
Curtailments
A curtailment is a large one-time payment made to reduce a loan balance. If you are in the happy situation of being able to curtail a mortgage you will not want to write a big check unless both the loan balance and the required monthly payment decline.
If you have a conforming loan and now pay mortgage insurance also ask about cancellation. Cutting both monthly loan costs and ending mortgage insurance can make a curtailment much more attractive. Lenders might go for such an offer because with a significantly lower loan balance they have less risk.
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