When Can I Eliminate My Mortgage Insurance?

When Can I Eliminate My Mortgage Insurance?

The average home price in Sacramento has increased by approximately $100,000 over the past 5 years. At this time in 2011, the average median home price was going for $145,000, whereas September 2015, the same homes increased to an average of $245,000. Coupled with rates still remaining at historic lows, if you’ve been paying mortgage insurance, this may be a good time to re-examine if it is still necessary.

What is Mortgage Insurance?

Mortgage Insurance comes in many different forms, but in short, it is an insurance policy that homeowners pay to protect the lender against default when the buyer puts down less than 20% on their home. FHA Loans always have mortgage insurance regardless of whether the buyer puts down 20% or not. Below is a table that shows both Conventional Private Mortgage Insurance and FHA Mortgage Insurance information.

Private Mortgage Insurance, PMI (Conventional):

PMI is used for Fannie Mae, Freddie Mac, and other Non-Agency Loans. A private mortgage insurance company will provide a policy to protect the lender against defaultFHA Mortgage Insurance:
This is mortgage insurance required for an FHA Loan. Typically an FHA Loan has Up-Front Mortgage Insurance Premium as well as annual premium is paid monthly to the government.
How long do I have to pay Mortgage Insurance before it can be eliminated?

Each servicer and/ or mortgage insurance company has different standards for the minimum time that private mortgage insurance must stay on the loan. A general rule of thumb is 2 years before it can be removed as long as the property appraises at under 80% Loan to Value, the amount of loan divided by the purchase price. The borrower must have at least 20% equity in the property. Contact your lender and mortgage insurance company directly to determine what rules, Loan to Value, and timelines will be required in order to remove your private mortgage insurance.Prior to June 3, 2013 – For FHA Loans originated before June 3, 2013, MI must be paid for at least 5 years. When paid down at a normal amortizing payment, not paying additional principal, this usually takes approximately 11 years. A 15-year mortgage takes a little over 4 years to hit 78%.

June 3, 2013 and After – For FHA Loan originated June 3, 2013 or after, if the borrower put down 10% or more they must keep mortgage insurance for at least 11 years. If they put less than 10% down, mortgage insurance must be paid for the life of the loan.

How Do I Remove PMI and MI?

PMI Removal: – Conventional Loan

If you feel your conventional home loan is at 80% Loan to Value or less, meaning that you have more equity, and you’ve met the 2 year timeframe, you may be eligible to remove PMI.
How is the Loan to Value Determined for PMI?

There are three ways to meet the LTV threshold: the value has gone up, you paid the mortgage principal down, or a combination of both. The value is determined by getting a new appraisal through the loan servicing company. An easy way to determine if it makes sense to try is by looking at other homes in your neighborhood. Similar homes with recent sales should give you good indication as to how much yours might be worth. Below are steps to remove PMI:

Steps to Remove PMI:

First, look at your mortgage statement for the Loan Servicer’s phone number. Contact them and let them know that you are interested in removing PMI. The servicer should have a form that they’ll ask you to fill out and send back to them. Each lender has different rules, but generally if there is over 20% equity, the MI should be eliminated. To determine your home’s value and equity, the lender should set up an appraisal. The appraisal fee will differ depending on location and type of property. Let the appraiser know about the positive features of the home, additions, and renovations you’ve completed. These things all impact the market value of your home. The appraisal should take about a week to be completed. Once the appraisal comes back at value, the lender should let you know that you are good to move forward in PMI removal. They’ll most likely charge a fee to remove PMI, but it will be minimal compared to monthly PMI payments that you would make over the life of the loan. The process should take about 4-6 weeks depending on the lender, their responsiveness and their timeline.

MI Removal – FHA Loan:

If you have an FHA Loan, it’s a different story. If your waiting period has been met, and your home is 78% Loan to Value, the FHA mortgage insurance will be cancelled. How Is the Loan to Value Determined for FHA? The loan balance is based upon what the principal has been paid down to. The Value is based upon the original value used to get the loan. For example, if the house was purchased at $300,000 7 years ago and the balance has been paid down to $200,000 through early payments, the loan to value is 67% and it should be eligible to remove MI. ** Note: Value is not determined by a new appraisal, it’s based off last know value of the property. Usually it is the original value.

Steps to Remove MI:

Once your loan has met the waiting period and the Loan to Value is 78%, MI should cancel automatically. If it has not, and you’ve determined that you should be eligible, contact your servicer directly to request that the loan be audited. Finding Your Servicer Information: In order to locate the phone number for your servicer, look at the top right hand side of your bill. That is usually where their number is located. Let them know that you would like to have them review your MI as you feel that it may be eligible to be eliminated.

Mortgage Insurance is NOT Permanent:

Even if you have not met the parameters required to cancel mortgage insurance, the positive news is that it is not permanent. With rates low and lender guidelines continuing to expand, now may be a great time for you to replace your FHA Loan with a Conventional Loan without mortgage insurance.

How Long Must I Wait to Refinance My FHA Loan?

While FHA does not have a waiting period, most lenders require that you have your FHA loan for at least six payments. Otherwise, it is considered an early pay off and there may be charges to pay it off early.

What Happens if My Loan is Not Eligible for MI Cancellation?

Refinance: If you feel that you have at least 20% equity in your home, you can always remove mortgage insurance by refinancing your mortgage. There are many different programs available, and if there is enough equity, you can even do a cash-out refinance to pay off debt. If rates are better, you will be able to get the prevailing rate. This can be a good way to reduce the amount of interest you pay annually as well as reduce your monthly payment.

Review Your Scenario:

If you would like to see what the current rates are or get help determining if your home is eligible, give us a call. We’re happy to review your scenario and let you know what is available.