Canceling Private Mortgage Insurance

Posted Mon, 2010-04-26 09:34 by Emily Caryl

This is the last post in a series of discussions about private mortgage insurance.  If you'd like to peruse the previous posts, see The Ins and Outs of Mortgage Insurance, Mortgage Insurance Options and Costs, and Mortgage Insurance Underwriting Guidelines.  Today's discussion concerns the standards for canceling private mortgage insurance.

Here's some acoustic Jerry to keep you company while you read.  I realize this goes against the bluegrass theme from the last several posts.  But it's pretty sweet and I felt compelled to share.

Piercy, CA¹

Private Mortgage Insurance Cancelation

Private mortgage insurance can usually be eliminated once a loan balance reaches 75-80% of the value of a property.  Borrowers who are considering mortgage insurance will want to become familiar with the guidelines for cancelation.  In most instances, borrowers can request that mortgage insurance be canceled long before a lender's automatic termination date.  There's certainly no sense in paying MI premiums longer than necessary!

There are two different sets of guidelines for canceling mortgage insurance.  One set of guidelines applies to mortgage loans that were sold to Fannie Mae or Freddie Mac.  Most conventional loans with mortgage insurance fall into this category.  Mortgages that have not been sold to FNMA and FHLMC are covered under the Homeowners Protection Act of 1999.  FHA loans are governed by a different set of guidelines altogether

Fannie Mae & Freddie Mac Standards

To determine whether or not you might be eligible to cancel mortgage insurance, first determine whether your mortgage loan was sold to Fannie Mae or Freddie Mac.  Enter your property address in the FNMA look-up tool and FHLMC look-up tool to see who owns your loan.  In my experience, these online tools are about 95% accurate.  If you don't see your property listed, call your lender to find out what type of loan you have.

Once you've determined that your home loan is owned by either FNMA or FHLMC, you will need to determine the following:

• The value of the property at the time you obtained your mortgage.  The value of your property is the sales price of the home (for purchase transactions) or the appraised value (for most refinance transactions).
• If your current mortgage was obtained at least two years ago, you should have a pretty good idea of the current value of the property.
• The current balance of your mortgage loan.

Fannie Mae and Freddie Mac each provide four scenarios under which mortgage insurance may be canceled.

Scenario #1.  A borrower may request cancelation of mortgage insurance after the loan balance has reached 80% of the original value of the property.  If you originally paid $300,000 for your home, and your current balance is $240,000 or less, you may be able to cancel your mortgage insurance.

Scenario #2.  A borrower may request cancelation of mortgage insurance after the loan balance has reached 75% of the current value of the property if the mortgage has been in place for 2-5 years.

Scenario #3.  A borrower may request cancelation of mortgage insurance after the loan balance has reached 80% of the current value of the property if the mortgage has been in place for five or more years.

Scenario #4.  Mortgage insurance will automatically be canceled on the date the loan balance is scheduled to reach 78% of the original value of the property.

In English, Please

So how long does it actually take before a mortgage loan meets one of the above scenarios?  Let's go back to the example we used in Mortgage Insurance Options and Costs, a $300,000 purchase price, 10% down payment, BPMI of $139.50 per month, and a 4.75% fixed interest rate with a 30 year term.

If the borrower made all mortgage payments on time and didn't make any additional payments beyond what was required, his loan balance would reach 80% of the original value of the property, during month 76.  The borrower could request that his mortgage insurance be canceled (under Scenario #1) after six years and four months.

The same borrower's loan balance would reach 78% of the original value of the property during month 89.  His mortgage insurance would automatically be canceled (under Scenario #4) after seven years and five months.  In other words, just by staying on top of things and knowing when to request cancelation, this homeowner could save $1,813.50 by requesting that his MI be canceled 13 months prior to automatic termination by the lender.

The borrower can save even more by knowing the current value of his property.  If his property increases in value at a conservative 1% per year, he could request MI cancelation after five years (under Scenario #3).  If the same property appreciates at 3% per year, the borrower could request cancelation after only 47 months (under Scenario #2).

The moral of the story:  Leave it up to your lender, and you'll pay mortgage insurance longer than is necessary.  Know your property value.  Know your loan balance.  And know when you have the right to request that your MI be terminated.

Other Types of Home Loans

Can you cancel mortgage insurance if your loan isn't owned by FNMA or FHLMC?  Eventually.  The Homeowners Protection Act of 1999 states that Borrowers may request cancelation of MI when their mortgage balance is first scheduled to reach 80% of the original value of the property, based solely on the initial amortization schedule and regardless of the actual balance of the loan.  In addition, the lender must automatically cancel mortgage insurance when the mortgage balance is scheduled to reach 78% of the original value of the property.

Borrowers with FHA loans must pay mortgage insurance premiums for a minimum of five years (for loan terms of more than 15 years).  After five years, mortgage insurance may be canceled when the loan balance has reached 78% of the original value of the property.

Additional Items of Interest

A borrower wishing to cancel private mortgage insurance may wish to keep the following items in mind:

• These rules only apply to mortgage insurance that is paid by the borrower (BPMI, SPMI, or Split MI).  Lender paid mortgage insurance is paid for the life of the loan.
• The guidelines above apply to single family primary residences and/or second homes.  Investment properties and properties with 2-4 units generally require the loan balance to be reduced to 65-70% of the value of the property before mortgage insurance may be eliminated.
• If borrowers don't have a satisfactory payment history, the lender may refuse to remove the mortgage insurance.
• The lender may request that the Borrower provide a satisfactory appraisal (at the borrower's expense) to document the current value of the home.

And that's everything I know about private mortgage insurance!  Questions, comments or concerns about PMI?  Please contact Emily Caryl or post your comments below.

1.  "Friend of the Devil," written by Jerry Garcia, John Dawson and Robert Hunter, performed by the Jerry Garcia Band, French's Camp (Eel River), Piercy, CA, August 29, 1987.

• Emily Caryl's blog
•