Mortgage insurance allows some people to purchase or refinance a home with less than 20% down payment or equity. While it provides a service and helps more homeowners into homes, mortgage insurance is an added cost that should be canceled as soon as possible. First I'll discuss the two main categories of mortgage insurance and then how to cancel each. Find out more about mortgage insurance with this post: What is mortgage insurance and why do I have to pay it?
PMI vs. MIPPMI stands for private mortgage insurance and may be attached to conforming, jumbo home loans. MIP stands for mortgage insurance premium and is required on all FHA loans. USDA loans have their own form of mortgage insurance as well.
Cancelling PMIThe cancellation of PMI was addressed by the Homeowner's Protection Act (HPA) in 1998. Effective after July 29, 1999, certain rules apply to the cancellation of PMI. You can read the HPA documents here.
The first rule set forth by the HPA was that PMI is automatically canceled when a homeowner is scheduled to reach 22% equity in the property. Another way of saying this is that it is automatically canceled at 78% loan-to-value with regular payments. The 78% figure is based on the original purchase price and amortization schedule and the homeowner must be current on the mortgage in order for automatic cancellation to apply.
The second rule set forth by HPA is that a homeowner can request that PMI be removed at 80% loan-to-value (same as 20% equity). In order to have the PMI removed by request, the following conditions must be met:
- The borrower must submit a written cancellation request
- The borrower has a good payment history
- The borrower is current on payments at the time of request
- There are no second liens on the property
- The borrower provides proof that the value has not declined
Can I get an appraisal to remove PMI?Maybe. If you believe your home has increased in value to the point where you have 20% equity, you can have it appraised and submit a request to have the PMI removed. There are a couple of drawbacks or risks with this plan. The first is that you need to pay for an appraisal without knowing whether or not your home will actually appraise for the value you are hoping for. The second is that the lender may not accept the value presented on the appraisal if they don't agree with the appraiser's methodology or selected comparable sales (read how appraisal values are determined here). This route may be worth it if you believe your home has plenty of value and you are paying quite a bit in monthly PMI. Some risk and $400-500 for an appraisal may be worth possibly removing $100 a month in PMI. Just be sure you've done your research before you attempt this.
Cancelling MIPRemoving MIP from FHA loans is a completely different process than PMI. The HPA laws are written for PMI, so they don't apply to MIP. June 3, 2013 is an important date with regard to MIP and when it can be canceled. Here are the terms for MIP before and after that date:
If a loan was taken out prior to June 3, 2013, these are the MIP cancellation rules:
- If the loan term is more than 15 years, the MIP automatically cancels at 78% loan-to-value so long as the borrower has made at least 60 payments.
- If the loan term is 15 years or less, the MIP automatically cancels at 78% loan-to-value.
If a loan was taken out after June 3, 2013, these are the MIP cancellation rules:
- FHA loans with an initial loan-to-value greater than 90% require MIP for the life of the loan.
- FHA loans with an initial loan-to-value of 90% or lower require MIP for 11 years, after which it can be canceled if the loan-to-value is 78% or less.
Can I get an appraisal to remove FHA's MIP?Since many FHA loans have minimum mortgage insurance time periods, even if you get an appraisal with a high value, it may not remove the MIP. If you have a recent FHA loan and you put less than 10% down, nothing can remove the MIP with the exception of refinancing, which brings us to the last topic on mortgage insurance.
Refinancing to remove mortgage insurance, PMI or MIPThe other method for removing mortgage insurance is to refinance into a loan without it. If the property has enough value and your current interest rate is higher than the rates available today, why not refinance to lower your rate and remove the mortgage insurance in one transaction? If your current loan is FHA and you have some equity, it may still make sense to refinance even if your rate is similar to those being offered on a conforming loan now. The monthly savings on mortgage insurance alone may be worth it.
I hope that helps clear up some of the confusion surrounding mortgage insurance, MIP and PMI.
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