When can you cancel mortgage insurance?

Mortgage insurance? Everyone hates mortgage insurance.  Unfortunately, depending on what home loan type you get, and especially if you put less than 20% down, you probably have to deal with it.

So if you get a mortgage loan that has it, the next big questions is “When can you cancel mortgage insurance?”

The answer can vary greatly depending on loan program chosen, the down payment size, and market conditions. Understanding the basic’s goes a long way in helping make a loan and down payment decision.

For standard conventional mortgage loans with monthly mortgage insurance (the plain old regular everyday home loan):

If you do nothing special but make your payments:

• About 110 monthly with 5% down
• About 89 months with 10% down
• About 56 months with 15% down

You can ask the lender to remove monthly mortgage insurance earlier if with the combination of paying down the loan, and home appreciation, you believe the amount you owe on the home is now less than 80% of it’s value.

For FHA Loans

For FHA loans with LESS than 10% down

• Life of loan (never goes away unless you refinance)

For an FHA loan with 10% down or more

• Exactly 132 months

You can NOT remove earlier even if you fall below 80% loan-to-value

For VA Loans

• No mortgage insurance EVER, so nothing to remove

For USDA Loans

• Life of loan. Never goes away

Other Mortgage Insurance Options

We all want to save some money, so understand that with standard conventional loans, you can also ‘buy out’ of monthly mortgage insurance that may save money in the loan run. There are two ways to do this:

Lender paid mortgage insurance – This is where your lender increases the loans interest rate to pay for the mortgage insurance in lieu of you paying it monthly. There are a ton of variables in this option to determine if it makes sense, and is not automatically good or bad.

Borrower paid mortgage insurance – This is where you pay an extra lump sum at closing to buy out of monthly mortgage insurance. Generally the cost is about equal to 40 payments of monthly mortgage insurance, and can really add up. As with lender paid mortgage insurance, there are many variables to determine if this options makes sense.

You can potentially do the old two loan option to avoid mortgage insurance. For example you get a standard loan at 80%, and a second mortgage at 10% (total = 90% financing). I’m not a gigantic fan of this option in most cases because when you do this, generally the first mortgage interest rate is .125% higher because your risk level is still 90%. Next, most home equity loans are variable rates, with minimum payments of interest only. I’ve seen many people take this option, then make small interest only payments. 10-years from now, they still owe the full amount, leaving themselves in worse position than if they had taken standard mortgage insurance.

How PMI has Changed

Finally, standard monthly mortgage insurance is very different today than just a few years ago. For most people, it is a lot cheaper.

All the mortgage insurance companies have switched over to risk based pricing. A 5% down loan needs to cover your risk 15% (to 80% loan-to-value), and is therefore more expensive that a 15% down loan, which only needs to cover your risk 5% (to 80% loan to value).

Next, credit scores matter too. Someone with excellent credit will pay significantly less in mortgage insurance than someone with weaker credit score.

One other factor is how many borrowers. Generally speaking, two well qualified people buying a home are less risk than just one person, so mortgage insurance even factors than to determine the cost. The simply reason being if there are two borrowers, and one has a job loss, they have less risk of default than just one borrower who has a job loss.

In the end, a good Loan Officer will also have, as part of your loan review, a conversation about mortgage insurance options with you. If they didn’t, call someone else!

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To apply directly with us, and find out what type of loan and mortgage insurance is right for you, just click the APPLY link right on this website.