What is the Worst Thing About Mortgage Insurance?

The worst thing about mortgage insurance is paying the monthly premium one month longer than is absolutely necessary. It seems like you have to pay mortgage insurance premiums forever, doesn’t it? The good news is you don’t. However, there are rules regarding mortgage insurance that must be understood and adhered to if you would like to eliminate mortgage insurance as quickly and efficiently as possible.

Mortgage insurance is typically required on Conventional loans where a borrower provides a down payment of less than 20% of the purchase price of a house. Two forms of mortgage insurance are required on ALL FHA and USDA loans, regardless of the size of the down payment. VA loans do not require mortgage insurance, but the VA requires a VA Funding Fee on all loans, except those for disabled veterans.

Mortgage insurance premiums decline gradually over the term of the loan as the principal amount of the outstanding mortgage declines. Because the risk of loss to the lender diminishes as the borrower’s equity stake grows beyond the 20 percent level, large investors like Fannie Mae and Freddie Mac permit cancellation of mortgage insurance coverage under certain circumstances. While there are similarities in the methods of cancelling mortgage insurance between Conventional and FHA loans, there are some important distinctions.

There are three mortgage insurance cancellation options:

• Borrower requested cancellation (applies to Conventional loans only),
• Automatic termination (applies to Conventional loans and certain FHA loans), and
• Refinance

You have the right to request that mortgage insurance be cancelled on or after the date the principal balance of your loan is scheduled* to reach 80% of the original value of the property or the date the principal balance actually** reaches 80%.

Mortgage insurance will only be cancelled by request at 80% if:

1. the borrower submits a written request for cancellation, and
2. the borrower has no payments greater than 60 days late within 24 months, and no payments greater than 30 days late within 12 months, of the date of cancellation

For Conventional loans, mortgage lenders typically require the borrower to pay annual mortgage insurance premiums for at least two years. The lender may also require an appraisal to verify that the value of the property has not declined below its original value, as well as certification that there are no additional outstanding mortgages, such as an equity line of credit, recorded against the property.

The annual mortgage insurance premium is automatically cancelled when the existing loan balance is scheduled* to be paid down to 78% of the original appraised value or the sales price at the time the loan was originated, whichever was lower.

New appraised values are typically not considered, however, there are exceptions. If you find that the value of your house has increased to a point where your existing loan amount is at or below 80% of the current value of your house and you would like to rid yourself of the mortgage insurance, you may need to refinance to a new Conventional loan.

For FHA loans with case numbers assigned after January 1, 2001, but before June 3, 2013, for mortgage terms greater than 15 years, the annual mortgage insurance premium (paid monthly) is automatically cancelled when the existing loan balance is scheduled* to be 78% of the original appraised value, or the sales price, at the time the loan was originated, whichever was lower, provided the borrower has paid the annual mortgage insurance premium for at least 5 years. New appraised values will not be considered!

For FHA loans with case numbers assigned on or after June 3, 2013, for mortgage terms greater than 15 years and an original mortgage amount (excluding the financed UFMIP) greater than 90% of the lesser of the purchase price or the appraised value, the annual mortgage insurance premium (paid monthly) is paid until the end of the mortgage term, or for the first 30 years of the term, whichever occurs first.

My goodness, who writes these rules? That is a long-winded and technical way to say that annual mortgage insurance premiums for FHA loans are now paid for the life of the loan. The only way to eliminate them is to refinance to a Conventional loan.

* Calculating when the principal balance is scheduled to be at 78% or 80% of the original appraised value is based on a borrower making a normally scheduled monthly payment without any additional principal added to the payment.

** If you elect to send additional principal payments with your regular monthly payment, or you send a lump sum payment at any time, the actual loan balance will be used instead of the scheduled loan balance.

The only truly bad thing about mortgage insurance is paying the monthly premium one month longer than is absolutely necessary. If you would like to find out what options are available to you to eliminate monthly mortgage insurance premiums please contact us to schedule a time to talk about your specific circumstances.