How Do I Cancel the Mortgage Insurance on My Texas FHA Loan?
In this age of slow economic growth, families are looking for any way possible to reduce expenses. Furthermore, homeowners who have taken advantage of low mortgage rates and attractive home prices to buy a new home may be looking for ways to reduce the cost of the mortgage over time. One way to accomplish this goal is to explore ways to cancel the mortgage insurance on your mortgage loan. Before we can talk about cancelling MI, we need to explore what mortgage insurance is and what it does.
Mortgage insurance, whether provided by private insurers on conventional loans (PMI), or government sponsored mortgage insurance on an FHA loan, protects lenders against default up to a certain amount. The availability of MI allows these lenders to make loans to borrowers who put less than a 20% down payment on the purchase of a home (loans that would otherwise be considered too risky). This mortgage insurance can run anywhere from about .25% of your loan amount to 1.15% of your loan amount depending upon the type of loan, your down payment, and your credit score.
To have your mortgage insurance cancelled, you must be able to demonstrate that you now have that 20% equity in your home that would not require mortgage insurance. There are two systems for getting MI removed: cancellation using the purchase price of the home and cancellation using the current market value. The Homeowner’s Protection Act of 1998 (HPA) creates the ground rules for both of these scenarios.
First, lenders are automatically required to cancel a mortgage insurance policy when the mortgage loan balance is scheduled to reach 78% of the original value or purchase price based upon the original amortization value, regardless of the outstanding balance. The borrowers must be current on their payments for this provision to activate. Borrowers can actually request their mortgage insurance be cancelled prior to the schedule date, when their mortgage balance reaches 80% of the initial value based upon the initial amortization schedule or 80% of value based upon the current balance. So simply paying attention to your amortization schedule or making principal reduction payments along the way and being proactive can save you a few month’s worth of MI payments, putting more money in your pocket. To do this, the homeowner needs to have a good payment history to take advantage of this and demonstrate the property’s value has not declined.
The other way to have your private mortgage insurance removed is through a written cancellation request based upon current value. The rules for removing MI are typically set by each lender individually. Mortgage insurance on FHA loans cannot be cancelled earlier than five years into the loan. A new appraisal must be secured by an independent appraiser that indicates the loan balance is 80% or less of the market value if the loan is more than five years old.
To put this potential savings into real dollars and cents, a recently secured FHA loan where a borrower puts the minimum required 3.5% down payment will typically carry an annual mortgage insurance cost of 1.15%, or $143 per month on a $150,000 loan. This mortgage insurance will automatically fall off about ten years into your loan. However, if you made principal reduction payments and perhaps added a swimming pool, you could have that MI removed early. If you were able to demonstrate that your equity exceeds 20% six years into your loan, the remaining four years worth of MI savings would amount to $6,900. I expect you can find much better ways to spend this money than giving it to the government.
Some private mortgage insurers have web sites that detail the process for a cancellation request, but your first call should be to the servicer of your mortgage. They should be able to inform you of whether you have government or private mortgage insurance, who the MI company is, and the process for requesting cancellation.
