What is Mortgage Insurance & paths to cancel PMI? [4 ways to drain MI!]
WHAT DOES MORTGAGE INSURANCE DO?
Mortgage insurance allows lenders to handle riskier loans by providing protection if you fail to make payments. If you purchased a home with a down payment of less than 20%, your payment likely includes a factor of mortgage insurance (PMI) in your conventional loan. Similarly, if you have a FHA loan, you pay a comparable charge known as a mortgage insurance premium (MIP).
These payments that protect the lender can add hundreds of dollars monthly to your mortgage payment. Certain loans require mortgage insurance and you must continue to pay the premium until you satisfy specific financial terms of your loan.
HOW IS MORTGAGE INSURANCE CALCULATED?
The monthly cost of mortgage insurance will depend on the type of loan and include several factors that include:
For a thumb nail sketch, you can easily estimate the monthly premium between a low of 0.5% to a high of 1% your total loan amount annually for mortgage insurance. Quick math, with a $100,000 home loan, this would amount to $500 to $1,000 per year, or approximately $42 to $83 month
PUT M.I. ON THE CLOCK!
There are several ways to remove your mortgage insurance. How quickly can depend on your loan type. The process for a FHA and a conventional loan will differ. If you have a FHA loan understand that you will have to pay MIP for 11 years or the full term of the loan based on the initial down payment. If you have a conventional loan there are several paths that include automatic, borrower, and terminal.
Automatic: If your payments are up to date and in good standing, your lender must cancel your PMI when your loan is set to reach 78% of your home's original value. The key word is "ORIGINAL" not the current.
Borrower: If your loan meets certain conditions and the loan-to-original- value (LTOV) ratio falls below 80%, you can send a written request to your mortgage company. First, contact the number provided on your mortgage statement to ask for the full requirements. Be aware that this will likely require a new appraisal, which you will need to pay. Your home's value may have increased due to appreciation or improvements you've made, such as a kitchen upgrade or a bathroom remodel. Make sure to consult your lender about any rules or prerequisites before you proceed with ordering your appraisal. Documentation of your improvements is critical with copies of checks, bank statements and paid invoices or receipts to confirm the proof is in the property.
Terminal: The HPA* is more than 25 years old and one of the provisions of the act was the elimination of MI once you are through the mid-point of your term. Most loans are 30 years and if you through 15 years of the amortization, it must be removed. You will need to be current on the mortgage.
* https://www.federalreserve.gov/boarddocs/supmanual/cch/hpa.pdf
OR, LEVERAGE A REFINANCE!
The drawback of simple methods is that they all require time. Maybe you purchased last year when rates were at their peak, while there is a chance you home value kept rising. Explore refinancing because it may help you lower the rate and reduce or eliminate your mortgage insurance.
For example:
If you bought your home for $100,000 and you borrowed $85,000 initially, you will have some factor of mortgage insurance as the original loan to value was 85%. If you have paid down your balance to $84,000 with the current market value of $105,000 then your current loan to value may be 80%. If you purchased your home with mortgage rates at 8% and the current rates are 7%, refinancing could potentially reduce your principal and interest (P&I) and mortgage insurance (MI) payments entirely.
Refinancing can be a quick cheat to rid yourself of mortgage insurance. If you haven't reached 20% home equity, the decision may depend on how quickly you can recover the closing costs through the improved monthly payment. Map out a break even analysis on the new loan. If you need help with organizing one, connect with us so we can assist in monitoring your mortgage for optimal rates and ways to reduce fees.
If you're interested in learning more about mortgages and refinancing, or if you have inquiries about eliminating PMI or MIP, get in touch with us. Contact Matthew via email for a quick Q&A (mortgage@mattthewsiket.com). Then, set up a timeline to aim for the removal of MI based on a future date. Reducing your payment by eliminating mortgage insurance will help you build equity more quickly and pay off your mortgage sooner. There are many ways to reduce MI; choose one and share your experience with your neighbors. Be a mortgage sleuth - don't let lenders sleep on your equity.