How to Cancel your Mortgage Insurance

Posted by on August 24th, 2017

This article outlines how to cancel your mortgage insurance.

Nearly 4 out of 10 people don’t know that you can buy a home with less than 15% down. When you do, you will be paying mortgage insurance – an insurance policy that protects the lender in case you don’t make your payments and default on your home loan.When-can-I-Cancel-my-Mortgage-Insurance

Many people believe mortgage insurance is a waste of money and want to get rid of it as soon as possible. Actually, I can show you the math where mortgage insurance is a very inexpensive alternative to the cost of waiting, but that’s another post.

If you have mortgage insurance on your home mortgage and want to get it removed, we have to first start by identifying the type of mortgage that you have.

If you have a VA loan, congratulations – you don’t have mortgage insurance. Done.

If you have a USDA loan, the only way you can get rid of your mortgage insurance is to refinance into a non-USDA loan program. However, depending on when you got your USDA loan, your mortgage insurance is super-cheap, so you shouldn’t stress about it.

If you have an FHA loan, then it gets more complicated, and I have previously written about those options.

Conventional loans currently dominate the mortgage market. These are not FHA, VA or USDA loans, and they are underwritten to Fannie Mae or Freddie Mac guidelines. When you invest less than 20% down on a conventional loan, you will pay mortgage insurance in form or another, either a monthly payment, a lump sum paid up front, or included into the interest rate. Since you cannot eliminate the mortgage insurance in the last two options, we’ll focus on cancelling the monthly mortgage insurance payment.

There are four ways to get rid of your monthly mortgage insurance payment:

  1. Pay it Down – Make enough principal payments on your loan so that your loan balance is reduced to 78% of the original purchase price or appraised value, whichever was less.Hand with calculator. Finance and accounting business.
  2. Cancel at 80% LTV – Instead of waiting until you get to 78% loan to value, you can request that your mortgage insurance is cancelled once you hit 80% of your original appraised value, which is 2% earlier than option #1. After the housing crisis of 2008-2010, it’s likely most servicers will tell you to just wait it out the remaining 2%.
  3. Recognize the Equity – If your home has appreciated in value enough that you believe you have at least 20% equity in your home, you can request a mortgage insurance cancellation from your loan servicer. Just recognize that you are currently paying for an insurance policy to protect the lender, and the lender would have to feel super confident about the market to waive what amounts to free protection for them. Plus, there are limitations on how soon you can request this. See the table below.
  4. Refinance – If you know you have 20% equity in your property and a new appraisal supports this, refinancing into a new loan is the sure-fire way to get rid of your mortgage insurance. You may have closing costs on your loan, and you will give up the interest rate you currently have.

It’s actually quite a complicated process as you can see by this mortgage insurance cancellation chart.

If you are interested in cancelling your mortgage insurance because you believe the market simply supports a higher value (referenced in option #3 in the list above), then there are some limitations on when that mortgage insurance can be cancelled. These limitations are put in place to protect the lender against short-term bubbles in the market:

Freddie Mac Fannie Mae
LTV < 75% and 2 to < 5 years after Origination of Mortgage. LTV/CLTV < 75% and 2 to 5 years of  “seasoning of mortgage loan” has occurred.
LTV < 80%, if > 5 years after Origination of Mortgage. LTV/CLTV < 80% if > 5 years seasoning of mortgage loan.
LTV < 80% and substantial improvements to mortgaged premises have increased market value = cancellation of MI at any time (with no minimum seasoning period.) LTV < 75% (on first lien mortgage) and property improvements made by borrower increased property value = 2-year seasoning requirement is waived. 
2-4 unit principal residence and 1-4 unit investment property must be
< 65% LTV (regardless of seasoning.)
2-4 unit principal residence and 1-4 unit investment property must be
< 70% LTV 
(regardless of seasoning.)

If you’re unsure if your conventional loan is owned by Fannie or Freddie, you can look it up using these links:

As always, if you need professional advice on this process, contact me, and we will be glad to assist you.

RELATED ARTICLES:

Big Misconception about Down Payments
When can I Cancel my Mortgage Insurance
Purchase a Home with No Monthly Mortgage Insurance

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