When Does My Mortgage Insurance Cancel?
One by-product of the banking crises and subsequent mortgage meltdown that started in 2007 was the elimination of second lien financing for loan-to-values exceeding 80%. This meant the return of both government and privately funded Mortgage Insurance (aka MI or PMI) for anyone with less than 20% down. While Mortgage Insurance is now commonplace in this market some may not know exactly what it is and for what it pays. MI is a policy taken out by the lender on the borrower to insure the mortgage in case of borrower default. But in this case it’s not the lender paying it’s the borrower that gets to pay the monthly premium. This amount is added to the monthly loan payment made to the lender/servicer. There are other types of mortgage insurance such as Lender-Paid Mortgage Insurance (LPMI) or even one-time mortgage insurance paid in a lump sum at the close of a transaction but make no mistake, it is the borrower that is paying for it. Government funded mortgage insurance (MI) is attached to FHA loans and Private Mortgage Insurance (PMI) is funded by private insurers like MGIC, Radian, and Genworth, etc.
When a person is faced with paying MI or PMI they naturally want to know for how long they must pay it and when it will be canceled. It breaks down like this:
FHA Financing (MI):
3.5% to 10.99% down payment – MI never cancels and is part of the monthly payment for the entire term of the loan.
11% or more down payment – Cancels at month one of year 11.
Conventional Financing (PMI):
5% down to 19.99% down – must pay PMI premium for a minimum of 2 years and the loan must reach 78% of the original appraised value.
The PMI cancels in three ways:
- Make all payments on time, stick to the amortization schedule laid out in the beginning of the loan term, and depending on the loan-to-value starting point the PMI will cancel when the loan reaches 78% of the original appraised value all on it’s own.
- Accelerate the payments to reach 78% by month 1 of year 3 and petition the servicer to have the PMI canceled.
- If home values have increased enough that you think the loan-to-value is 78% or less and you’ve reached month one of year 3 call the loan servicer first and then order an appraisal to show the current market value supports the cancellation guideline.
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