When a borrower buys a house with less than 20% down payment, they are usually required to have mortgage insurance on their loan. However, this does not mean that they need to carry that insurance for the life of the loan. The insurance payment structure and cancellation terms vary depending on the type of loan program the borrower selects but we will review a few common scenarios here. If a borrower has a conventional loan with monthly mortgage insurance, the following rules apply to remove the monthly charge:
- Mortgage insurance must be in effect for at least 2 years for any of the following to apply.
- After the borrower pays the mortgage down to 80% of the purchase price they can petition the removal of the charge.
- After the borrower pays the mortgage down to 78% of the purchase price the lender may remove the mortgage insurance without being prompted.
- The mortgage insurance might also be petitioned off through appreciation or value increase due to home improvements. Between 2-5 years in the mortgage, 25% equity in the property is required to qualify for this removal.. After 5 years in the loan, as little as 20% equity in the property can get it removed.
Items 1-3 are outlined in a disclosure signed at the time of closing on the loan. Item 4 represents a hidden opportunity for home owners with mortgage insurance (on a conventional loan) to avoid the fees associated with refinancing.
For example, in the Pacific Northwest, we have experienced rapid appreciation in our housing market over the last decade. If a borrower bought a $300,000 house in May of 2014 with 5% down and it appreciated 10% per year each of the first 3 years, their house would be worth $399,300 in May of 2017. Their original loan balance of $285,000 would now be 72% of their value. The borrower in this example would be eligible to petition their mortgage insurance.
The process to petition off mortgage insurance will vary from lender to lender, but should follow the same general guidelines as the one that I have attached (see below). Begin with calling your lender’s servicing department. Tell them you are interested in petitioning to remove your mortgage insurance (be clear that you are not looking to refinance). You can expect to pay for an appraisal $600-$900 out of pocket and that the process should take 30-60 days.
Many lenders use mortgage insurance removal as a potential refinance opportunity. If the borrower is in a loan that requires mortgage insurance for the life of the loan (i.e. FHA and USDA), refinancing can be a viable option. However, a borrower with a conventional loan might be better served to petition the mortgage insurance off of the loan and only incur the cost of a $600-$900 appraisal vs. the potential $3000-$4000costs associated with refinancing.
In short, when looking into removing the monthly mortgage insurance from your loan be sure to inquire about petitioning it off based upon the appreciation of your market.
Guild Mortgage is an Equal Housing Lender NMLS #3274; Todd Gydesen NMLS ID #89835. I am licensed to do business in the states of Oregon and Washington. ML-176; 5400 Meadows Rd., Suite 150 Lake Oswego, OR 97035. All loans subject to underwriter approval; terms and conditions may apply. Subject to change without notice.The information provided herein has been distributed for education purposes only. The positions, strategies or opinions of the author do not necessarily represent the positions, strategies or opinions of Guild Mortgage Company or its affiliates. Each loan is subject to underwriter final approval. All information, loan programs, interest rates, terms and conditions are subject to change without notice. Always consult an accountant or tax advisor for full eligibility requirements on tax deduction.