Mortgage insurance is often required for borrowers who make a down payment of less than 20% on their home. While mortgage insurance can be a helpful tool for securing a loan, many homeowners want to know how to cancel it once they’ve built enough equity. Here’s everything you need to know about the mortgage insurance cancellation rules.
What is Mortgage Insurance?
Mortgage insurance (MI) is designed to protect the lender in case the borrower defaults on the loan. There are two types of mortgage insurance: Private Mortgage Insurance (PMI) for conventional loans, and Mortgage Insurance Premium (MIP) for FHA loans. PMI is typically required for loans with a down payment of less than 20%, while MIP is required for FHA loans, regardless of the down payment amount.
How to Cancel PMI on a Conventional Loan
For conventional loans, PMI can be canceled under certain conditions. Here’s a breakdown of the rules:
1. Automatic Cancellation
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When You Reach 78% Loan-to-Value (LTV): Federal law mandates that PMI must be automatically canceled when your loan balance reaches 78% of the original appraised value or purchase price (whichever is less) of the home. This is based on the original amortization schedule and assumes you have a good payment history.
2. Borrower-Requested Cancellation
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When You Reach 80% LTV: You can request to cancel PMI once your loan balance drops to 80% of the original value of the home. You will need to request the cancellation in writing, and the lender may require a current appraisal to verify the home’s value.
3. Criteria for Cancellation
- Timely Payments: Your payments must be up to date to qualify for PMI cancellation.
- Home Value: The lender may require a current home appraisal to verify that the home’s value hasn’t decreased significantly.
How to Cancel MIP on an FHA Loan
Unlike PMI on conventional loans, MIP on FHA loans has different rules for cancellation. Here’s what you need to know:
1. Mortgage Insurance for FHA Loans
- Upfront MIP: FHA loans require an upfront MIP that can be financed into the loan or paid at closing. This upfront fee is typically 1.75% of the loan amount.
- Annual MIP: FHA loans also require annual MIP payments, which are paid monthly as part of your mortgage payment.
2. Cancellation Rules for FHA MIP
- If the Loan Was Taken After June 3, 2013: For loans with an LTV greater than 90%, the MIP will last for the entire term of the loan. You cannot cancel it, even if you reach 20% equity. However, if the LTV is less than 90%, MIP will automatically drop off after 11 years.
- Loans Taken Before June 3, 2013: For loans with an LTV greater than 90%, MIP can be canceled once the loan balance reaches 78%. If the LTV is less than 90%, MIP can be canceled after five years, provided the borrower is up to date with payments.
Important Considerations for Mortgage Insurance Cancellation
1. Refinancing Your Loan
If you are unable to meet the criteria for PMI or MIP cancellation, another option is to refinance your mortgage. Refinancing can allow you to eliminate the mortgage insurance if your new loan is at 80% LTV or lower.
2. Impact on Loan Terms
Refinancing can change your loan terms, and you might get a lower interest rate or better terms, which could reduce your overall costs. However, refinancing also involves fees, and it’s essential to weigh these costs against the potential savings.
Conclusion
Mortgage insurance cancellation can save homeowners significant money once they’ve built up enough equity in their homes. For conventional loans, PMI can often be canceled once the loan balance reaches 80% of the original home value, and for FHA loans, MIP can be canceled based on different criteria. Understanding the rules for canceling mortgage insurance can help you plan your mortgage payments effectively and save money in the long run.