Canceling private mortgage insurance (pmi)

By
Mortgage and Lending with Academy Mortgage NMLS#329710

The issue of being able to cancel mortgage insurance comes down to one issue:  when was the loan originated?  As mentioned in previous sections, loans written on July 29, 1999 or later are covered by the Homeowner's Protection Act of 1997.  Loans originated prior to that date are dependent upon the type of loan, the lender, and the amount of equity in the home owner's house.

The Homeowner's Protection Act of 1997 requires any conventional loan originated on or after July 29, 1999 to automatically terminate when the outstanding principal balance reaches 78% of the home's original purchase price. Furthermore, the home owner may request the cancellation of the mortgage insurance once the outstanding principal balance reaches 80% of the original purchase price.

This may sound like a great provision, but how many months or years will it take the principal balance to reach 78% of the original purchase price.  Look at the example of a young couple that purchased a home for $100,000 with a 5% down payment and an 30 year fixed interest rate of 8%.  The couple's principal and interest payment is $697.08 per month ($95,000 loan amount at 8% for 30 years) and a mortgage insurance payment of $61.75 per month.  According to the Homeowner's Protection Act, the principal balance must reach $78,000 (78% of the original purchase price of $100,000) before the $61.75 is automatically terminated which will take 154 months or 12.83 years.  That is approximately $9,509.50 in mortgage insurance premiums.

Certain agencies, such as Fannie Mae and Freddie Mac may have provisions in the note agreement that automatically cancel the mortgage insurance when the loan reaches its "half-life", e.g. the fifteenth year of a 30 year loan.

Also, many home owners may be able to request cancellation of their mortgage insurance once he/she has at least 20% equity in the home.  Generally these requests are accepted on a case by case basis and may require an out-of-pocket expense by the home owner to prove the value of the home (usually through an appraisal).  There are certain restrictions or steps involved.  The home owner should contact his/her mortgage company about the steps involved.

Unfortunately for many home owners with an FHA insured mortgage that are written before January 1, 2001, he/she will have to pay mortgage insurance for the life of the loan.  The only way to remove the mortgage insurance is to refinance the mortgage.

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