Do you have Mortgage Insurance?

Key insights

  • Conventional loan borrowers are required to pay private mortgage insurance until their loan-to-value ratio reaches 80%.
  • To get their mortgage insurance canceled, borrowers should contact their loan servicer in writing.
  • To get their insurance removed faster, borrowers can also make accelerated payments or get their home re-appraised.

 

When are borrowers required to pay mortgage insurance?

In order to understand the need for mortgage insurance, it’s important to first discuss the concept of a loan-to-value (LTV) ratio. Your LTV ratio is the total amount you borrowed in your loan, divided by the value of the property that you purchased. As you make contributions to your loan premium, your LTV ratio will decrease.

 

How loan-to-value ratios are calculated for a $400,000 house:

Percent down

Money down

Total loan amount

LTV ratio at closing

20%

$80,000

$320,000

80%

15%

$60,000

$340,000

85%

10%

$40,000

$360,000

90%

Here’s a faster way to think of it:

  • If you put 20% down at closing, your LTV ratio would be 80%.
  • If you put down 15% at closing, your LTV ratio would be 85%.
  • If you put 10% down at closing, your LTV ratio would be 90%.

If a borrower’s LTV ratio is above 80% at closing, lenders require monthly mortgage insurance premiums. Because borrowers who put down 20% or more at closing are less likely to default on their loan, lenders typically do not require them to pay mortgage insurance.

Conventional loan borrowers will pay private mortgage insurance payments (PMI) until their LTV ratio reaches 80% at minimum. FHA borrowers, on the other hand, will pay an up-front mortgage insurance premium at closing; they will also be expected to pay monthly premiums for the life of their loan.

Read more about mortgage insurance for FHA loans.

When does private mortgage insurance get canceled?

On closing day, conventional loan borrowers will be given two dates to keep in mind. Assuming the new homeowners make all payments on time and do not accelerate their mortgage payments, they’ll be informed of:

  1. The date when the LTV ratio will reach 80%, and their loan servicer is allowed to cancel their mortgage insurance.
  2. The date at which their LTV ratio will reach 78%, and their loan servicer is required by the government to cancel their mortgage insurance.

In most cases, loan servicers drop the insurance requirement at a 78% LTV ratio. If a borrower wishes to request mortgage insurance cancellation at 80%, they can do so in writing to their loan servicer.

What steps can borrowers take to cancel their PMI?

After closing, it’s likely that your loan was sold by your original lender. The vast majority of loans are sold to loan servicers after closing. Your loan servicer is who you currently send your monthly mortgage payments to; this is also the entity that may be able to cancel your mortgage insurance upon request.

At 80% LTV, you can contact your loan servicer to request that they drop your monthly mortgage insurance premiums. To be considered, you must:

  • Put your request in writing.
  • Have a history of on-time payments (though this may be waived if a few payments were delayed due to the COVID-19 pandemic).
  • Not have any outstanding liens on your property.

Your servicer will be in touch to inform you of their decision. Keep in mind that if you aren’t sure if you’re eligible for cancellation, there’s no harm in contacting them. “My guidance is, always call your loan servicer and talk to them,” said Edina Realty home mortgage consultant Enda Moore. “They will be able to guide you through the necessary steps to determine if you are eligible to have your monthly insurance premiums removed. The worst thing they’ll say is, ‘No, it’s not time yet.’”

How else can borrowers get their mortgage insurance requirements removed?

There are a few other ways that you can get your mortgage insurance requirements removed even before the dates you are given at closing.

1. Make accelerated payments to remove PMI

If you make accelerated mortgage payments, you’ll begin paying off your loan premium faster than the schedule set by your lender. This means that your LTV ratio should drop to 80% before the original date you were given at closing. If you have accelerated payments but aren’t sure of your current LTV ratio, divide your current loan balance (which can be found on your latest statement) by your home’s appraised value. Multiply this number by 100 to get your current LTV percentage.

2. Refinance your loan to remove PMI

While most borrowers refinance to take advantage of lower interest rates, it’s also possible to refinance as a way to get your mortgage insurance requirement eliminated. This is especially possible in a housing market with fast-rising home values, like the one we have today.

If your home’s appreciation rises to the point when you have 20% equity, then refinancing could be a smart option to remove your mortgage insurance. Your lender can help you calculate if the cost of refinancing will save you money in the long term, after the cost of closing is factored in.

“If you’re currently financed at a higher rate than what we’re seeing today, and you think your home price has risen over the last few years, it’s worth looking into refinancing,” says Enda Moore. “Even if you don’t remove your insurance altogether, you may see a reduction in your monthly insurance payment, and a lower monthly premium as well.”

3. Get an appraisal to remove PMI

Last, you may be able to get your PMI requirements removed if you get a home appraisal showing your home has increased in value. If your home’s value has risen significantly (either due to the market or updates you’ve made to the property), that could allow you to request an early cancellation of your mortgage insurance from your loan servicer. Be sure to contact your servicer before you go down this path, as they may have special requirements or rules for you to follow.

Ready to get started?

Mortgage and mortgage insurance can be tricky topics, but you don’t have to go it alone. The best way to determine your eligibility for removing PMI is to contact your loan servicer. If you need other help understanding your loan, you can also reach out any time for one-to-one guidance.


*Call Sarah First, Inc. does not offer financial advice. This information is provided for informational purposes only and does not constitute legal, tax, or financial advice. Not all borrowers will qualify.

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