Because we aren’t all Warren Buffett sitting on a mountain of money, many of us don’t have a 20% down payment when it comes time to buy a house. The good news is you can still put down less than 20% – you just have to pay mortgage insurance.
Mortgage insurance gives you a lot more buying power because you don’t have to bring as much money to the table in the form of a down payment. The downside is that it’s an additional item tacked on your mortgage payment every month.
The goal of this post is to give you some clarity around if and when you can get rid of your mortgage insurance. In some cases, it vanishes into thin air of its own accord.
First, we’ll go over some factors affecting whether you can get rid of your mortgage insurance and when you can do it. After that, we’ll look at how these factors together help you determine whether or not you can eliminate your mortgage insurance.
Factors Affecting Your Mortgage Insurance Removal
There are six factors that affect whether your mortgage insurance can be removed: the type of mortgage insurance involved, who holds your loan, the loan-to-value (LTV) ratio, the property type, the age of the loan and whether or not your property value has increased.
Types of Mortgage Insurance
Before we go any further, there are two types of mortgage insurance to define: private mortgage insurance and mortgage insurance premiums.
If you pay mortgage insurance on a monthly basis on conventional loans, that’s called private mortgage insurance (PMI).
You pay mortgage insurance premiums (MIP) on FHA loans. You pay a portion of the premium upfront at the close of the loan and then continue to make payments on a monthly basis.
Who Holds Your Loan?
The next thing you need to know is who your loan investor is. Fannie Mae and Freddie Mac have different policies regarding when mortgage insurance can be eliminated. Depending on the age of your loan and the amount of your down payment, MIP may or may not be removable from FHA loans.
If you don’t know whether your conventional loan is held by Fannie Mae or Freddie Mac, you can use their lookup tools. Here’s one for Fannie and one for Freddie.
Loan-to-Value (LTV) Ratio
Maybe the most important aspect of whether your mortgage insurance can be canceled is your loan-to-value (LTV) ratio. In simplest terms, your LTV measures the amount of equity you’ve built up in your home. The number signified by the ratio is the percentage of your home value you still have to pay off.
Your LTV is based on the original value of your home. Original value is either the appraised value or the purchase price, whichever is lower. Let’s look at a quick example.
If you purchase a home for $100,000 that’s appraised at $120,000, LTV would be calculated based on the purchase price. Therefore, if you made a $10,000 down payment, you would be at 90% LTV. Your LTV continues to go down as you make payments. It also goes down as your property value goes up.
The requirements for removing PMI also change depending on the type of property you have. We’ll get into specifics later on. For right now, the important thing to know is that removing mortgage insurance on a one-unit primary residence or vacation home is easier than taking it off multi-unit primary properties or investment homes.
Age of the Loan
In some instances, the age of the loan is a determining factor in whether mortgage insurance can be removed. This especially comes to the forefront when trying to remove FHA MIP. It also sometimes makes a difference when you’re trying to remove PMI due to a gain in equity caused by an increase in your property value.
If you’ve made substantial property improvements that cause increases to the value of your home, you’ll need to get a new appraisal to substantiate the improvements. Depending on the age of your loan, it may also change the amount of equity needed to remove the mortgage insurance.
Now that we know the factors that affect whether or not your mortgage insurance is eligible to be canceled, let’s see how these things interact with some real-world examples.
MIP cancellation is the easiest scenario to take a look at. Unfortunately, the reason for this is that it can’t be canceled in many cases.
If your loan closed on or after June 3, 2013 and you had a down payment of less than 10%, MIP will never be removed. With down payments of 10% or more, you still have to pay MIP for 11 years.
If your loan closed before that date, the outlook is a little better. On a 15-year term, MIP is canceled when your LTV reaches 78%. For longer terms, the LTV requirement remains the same, and you have to pay MIP for at least five years.
Conventional loans are the most flexible type of loan, allowing borrowers to purchase the greatest range of properties. However, this variety means there are a lot of variables that come into play in determining when or if mortgage insurance can be canceled.
One-Unit Primary Residence or Vacation Home
If the residence is your single-family primary home or second home, your mortgage insurance will be canceled automatically in either of the following scenarios, whichever happens first:
- The LTV reaches 78% (and you didn’t make extra payments to get it there)
- You reach the midpoint of your mortgage term (15 years on a 30-year mortgage, for example)
To give these numbers some context, if you had a 10% down payment at an interest rate of 4.0%, you’ll reach 78% LTV after 81 months. The same scenario with a 5% down payment would take 104 months. The auto cancellation occurs as long as you’re current on your payments.
If you don’t want to wait for it to auto cancel, you have some options. If your LTV reaches 80% through payments, you can request cancellation. In most cases, you will have to get a new appraisal in order to verify that your home didn’t lose value.
Fannie Mae and Freddie Mac both allow you to make extra payments on the balance in order to get down to 80% faster.
If you’ve made home improvements to increase your equity by increasing your property value, Fannie Mae requires that you have 75% or less LTV before they will take off mortgage insurance. Freddie Mac leaves the requirement at 80%. All improvements have to be called out specifically in a new appraisal.
If you’re requesting removal of your PMI based on natural increases in your property value between two and five years after your loan closes, both Fannie Mae and Freddie Mac require a new appraisal, and the LTV has to be 75% or less. If your removal request comes more than five years after your closing, the LTV can be 80% or less with a new appraisal. These requirements apply to insurance removal based on market value increases not related to home improvements.
Multi-Unit Primary Residence or Investment Property
If you have a multi-unit primary residence or investment property, things are a bit different. With Fannie Mae, mortgage insurance cancels halfway through the loan term on its own. Freddie Mac does not auto-cancel mortgage insurance.
You can cancel PMI on your own when LTV reaches 70% based on the original value with Fannie Mae. Freddie Mac requires 65% for cancellation.
The requirements for Fannie and Freddie are the same if you want to have a new appraisal done to show a lower LTV. This is true whether the lowered LTV is based on a natural market-based increase in home value or home improvements. Please keep in mind that you must have had the loan for at least two years prior to requesting PMI removal on your investment property.
Note on Cancellation
There are a couple additional things to know about mortgage insurance cancellation. In order for mortgage insurance to auto-cancel, you have to be current on your payments. If you want to request a cancellation yourself, you can’t have had a 30-day late payment in the last year. You also can’t have had payments more than 60 days late in the past two years.
In order to better help you figure out which situation applies to your loan, we’ve put together a sheet that should help you out.
To begin with, here are the requirements to remove PMI from conventional loans. Click the images below to enlarge.
There are some stipulations regarding how and when PMI can be removed.
FHA loans have very specific requirements for when MIP can be removed.
Hopefully this post has helped make more sense out of your mortgage insurance. Still have questions? Ask in the comments below!
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