Wednesday, June 19, 2013

How to remove the monthly Mortgage Insurance payment, aka MI or PMI, from your home loan...

With Sacramento home values on the rise, several past clients have gotten in touch with me recently wanting to know three things: (a) how much is their home worth, (b) is it worth enough to remove my mortgage insurance, and (c) what is the process to do that?

First for those who don't already know, I should explain what Mortgage Insurance is. Mortgage Insurance, aka MI or PMI, is insurance that borrowers must pay for and is typically required for conventional mortgage loans when down payments or equity is below 20%, and ALL FHA loans. This insurance compensates lenders or "investors" for losses due to the default of a mortgage loan. The cost of mortgage insurance varies based on the amount of the initial downpayment for the loan, and how large the loan itself is.

So for example, if a buyer purchased a home with a conventional loan for $175,000, and made a 5% ($8,750) downpayment, the total loan would be approximately $166,250. At a 5% interest rate, the total monthly mortgage payment including loan principle, interest, property taxes, homeowner's insurance, and mortgage insurance would be approximately $1,235. About $109 of this payment would be mortgage insurance. Alternatively, if a buyer purchased a home for $400,000 and made a 10% ($40,000) downpayment, the total loan would be approximately $360,000. At a 5% interest rate, the total monthly mortgage payment would be approximately $2,625, and about $159/month would be mortgage insurance.

Wouldn't it be nice to erase that mortgage insurance portion of the payment and save some money? Here are the requirements for requesting the cancellation of your mortgage insurance on your primary residence:
  • You must not have any "subordinate" loans. Basically you can not have a Home Equity Line of Credit (HELOC), 2nd mortgage, etc.
  • You must have a good payment history -- don't make late payments!
  • You must have been making payments on the loan for at least 2 (or more) years. Sorry...if you bought your house last year you have to wait...
  • Your loan balance is either 80% of your original sales price, or you can demonstrate that your home has increased in value so that you have 20% equity.
So basically -- If you bought your Sacramento home for $175,000 2+ years ago, and you currently owe about $161,000 (based on my scenario above, the original financed amount of $166,250 would have been paid down to that amount), you must be able to demonstrate that your home is worth more than $200,000. The lender will determine the value either by an AVM -- a Zillow-like automated valuation tool, or you can do a full appraisal. You must provide a written request for cancelling your mortgage insurance. Call your loan servicing company and ask them where to send this request. Some will allow you to do this by fax and others will require it to be mailed. Specific criteria may differ from lender to lender, and mortgage insurance company to mortgage insurance company, so do your homework.

Given the current upward thrust of the Sacramento real estate market, many folks who financed a Sacramento area home 2 years ago will be able to make a strong case to their loan servicer that this monthly mortgage insurance be cancelled.

Another thing to note is that per the Homeowners Protection Act of 1998 (HPA), which covers single-family primary residences whose sales were closed on or after July 29, 1999 -- a borrower can request cancellation of mortgage insurance on the date the mortgage loan balance is first scheduled to reach 80% of original value, based solely on the initial amortization schedule of your loan (how it's paid down with your monthly payments), regardless of the outstanding balance of the loan. Again, you must request this of your loan servicer in writing and meet other criteria -- like timely payments.

If I can provide you with an estimate of your home's value to help you determine this, please send me an email to and I am happy to provide you the data and a letter template to make your request to the loan servicer. If you have read my blog posts about tools like Zillow, you will know that I believe they are completely inaccurate (and for Sacramento homes, mainly just too low right now!).

Unfortunately, if you purchased with an FHA loan, you have a much longer wait (anywhere from 5 years, to when you pay off your loan, depending on when you made your purchase) to remove your mortgage insurance. Depending on your circumstances, if you have adequate equity and a good payment history -- it might just make sense to refinance your loan. One of my past FHA buyer clients is refinancing, transitioning from a 30-year FHA loan to a 15-year Conventional loan. He is lowering his interest rate, and getting rid of the MI, and his monthly payment is staying about the same! So basically he will own his home in half the time. Amazing...

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