Lower your mortgage payment by dumping your mortgage insurance
According to the National Association of Realtors 2021 Down payment Expectations & Hurdles to Homeownership report, the median down payment in 2021 was 13 percent for all buyers, seven percent for first-time buyers, and 17 percent for repeat buyers. The median is where half paid above that percentage and half paid less than that percentage. NAR also noted that “more than 70% of noncash, first-time home buyers — and 54% of all buyers — made down payments of less than 20% over at least the past five years”.
Twenty percent equity in a property is a benchmark often quoted by lenders and mortgage experts because it is the point below which mortgages must be insured against losses due to borrower defaults. While borrowers pay the mortgage insurance premiums, it is the lender who is protected by the insurance. A good rule of thumb is the lower the down payment percentage, the higher the insurance premium. Premiums typically range from 0.5 to 1.5 percent of the loan amount annually. For example, a 1.5 percent premium on a $150,000 mortgage would add $62.50 to the first month’s payment ($150,000 x 1.5% ÷ 12 = $62.50). A few cents are knocked off each successive month’s premium as the principal balance, on which the percentage is based, is reduced.
So, how does one dump their mortgage insurance? The answer depends on the type of loan. VA and USDA loans don’t have mortgage insurance, per se, but do require one-time payments up front to cover future defaults. The VA refers to it as a funding fee. USDA refers to their version as a guarantee fee. In neither case can the one-time payments be refunded.
All FHA loans carry mortgage insurance, which consists of an up-front fee as well as a monthly fee. For borrowers who obtained their FHA mortgage before June 3, 2013, the mortgage insurance will drop off when the loan balance is reduced to 78-percent of the original mortgage amount as long as the loan is at least 5-years old. For borrowers who obtained an FHA loan after June 3, 2013 and put less than 10-percent down (the minimum is 3.5-percent), the premiums remain in place for the life of the loan. Borrowers who put more than 10-percent down may cancel at 78-percent or 5-years, depending on the original loan term.
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Mortgage insurance on conventional loans may be cancelled in two ways; automatic cancellation and buyer requested cancellation. The automatic cancellation kicks in when the loan balance reaches 78-percent of the original loan amount. However, borrowers may request that the insurance be cancelled at 80-percent of the original amount. In some cases, lenders will allow mortgage insurance cancellation when the loan balance is equal to or below 75-percent of the current appraised value as long as the loan is at least 5-years old, according to Michael Carol, account manager at Mortgage Guarantee Insurance Corporation (MGIC). This is a boon to homeowners whose home value has risen significantly over the years. The option is only available to owner-occupied mortgages held by Freddie Mac or Fannie Mae. The ultimate decision regarding removal of the insurance is up to the loan servicer.
The loan servicer is the entity that is collecting monthly mortgage premiums on behalf of the owner of the mortgage. Borrowers who believe they may be eligible to have their mortgage insurance cancelled need only contact the servicer who collects their payments. There are numerous other facets of the cancellation options, according to the PMI Cancellation Act passed by Congress in 1998 102012_cfpb_homeowners-protection-act-hpa-pmi-cancellation-act_procedures.pdf (consumerfinance.gov). Checking them out may be the key to cancelling your mortgage insurance and putting hundreds of additional dollars in your pocket each year.
See you at closing!
Gary Sandler is a full-time Realtor and owner of Gary Sandler Inc., Realtors in Las Cruces. He loves to answer questions and can be reached at 575-642-2292 or Gary@GarySandler.com.
This article originally appeared on Las Cruces Sun-News: Lower your mortgage payment by dumping your mortgage insurance
