If you are a first-time homebuyer, buying a home and obtaining a mortgage can seem like navigating through a field of land mines. For new buyers who can afford less than a 20% down payment, you may be required to have mortgage insurance. In the U.S., 15% of all mortgages have mortgage insurance for an average of 5 ½ years.
Mortgage Insurance is required until there is 20% equity in your home. It is paid monthly along with the principal and interest on your loan, and is based on several factors, including your credit, the amount of your down payment and loan term.
LTV and mortgage insurance
Loan to Value (LTV) is key when determining how and when to drop your mortgage insurance. LTV can be calculated by dividing your current loan balance by your original purchase price. Once the LTV reaches 78% of your original appraised value on a conventional loan, lenders are required to drop your mortgage insurance. Or, once the ratio reaches 80%, you can initiate a request to end the mortgage insurance early.
Most lenders will ask for a written request to cancel Mortgage Insurance early. Homeowners must be current on their mortgage payments for their lender to consider an early mortgage insurance termination. In addition, a new appraisal may be required to calculate whether the LTV has reached the 80% ratio.
If you have an FHA home loan, there are different rules. FHA has a different type of mortgage insurance known as Mortgage Insurance Premium or MIP. With a down payment of less than 10%, MIP will be paid for the life of the mortgage. With a down payment of more than 10%, MIP will be automatically canceled after eleven years.
In order to analyze the cost-benefit scenario for early termination, you should calculate the cost of the monthly insurance payments until the estimated 78% threshold and determine whether this amount exceeds the costs of obtaining a new appraisal.
Other options for eliminating Mortgage Insurance
The Homeowners Protection Act passed into law in 1998 provides for many different forms of loan protection, including the law relating to Mortgage Insurance. Lenders are required to eliminate Mortgage Insurance after the midpoint of the term of the loan.
This requirement is effective even if the LTV exceeds the 78% threshold that also triggers the automatic removal of PMI. If you are considering refinancing your home, doing so requires a new appraisal, so in effect, you can take advantage of better loan terms without Mortgage Insurance.
At First Centennial Mortgage, we provide the trust, guidance and market intelligence for you to have confidence in purchasing or refinancing your home, and we invite your questions and lending inquiries. Contact us today.