How to cancel private mortgage insurance
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.
How to calculate private mortgage insurance
As mentioned in other sections, there are two factors that determine how much mortgage insurance a home buyer will pay: 1) the type of loan and 2) the amount of down payment. Using the chart below, you will see what percentage the home owner will have to pay for the outlined home loan programs.
| % down | 30 year fixed | 15 year fixed | 1 year ARM |
|---|---|---|---|
| 5% | 0.78% | 0.72% | 0.92% |
| 10% | 0.52% | 0.46% | 0.65% |
| 15% | 0.32% | 0.26% | 0.37% |
Each lender will have a different rate chart that they use. In general, the percentages listed above are the most common factors used when calculating mortgage insurance.
For a consumer to estimate the cost of mortgage insurance, use the following calculation to determine the monthly cost:
Loan amount x factor / 12
For example, if a home buyer is getting a 30 year fixed rate loan and putting 10 percent down on a home with a $100,000 loan, the mortgage insurance factor is 0.52% (or 0.0052). To calculate the mortgage insurance, the calculation would be:
100000 x 0.0052 = 520
520 / 12 = 43.33
The monthly mortgage insurance would be $43.33 per month or $520 per year.
Conventional Loans and Private Mortgage Insurance (PMI)
On most conventional loans originated in the United States with less than a 20% down payment, the borrower is required to pay mortgage insurance in one for or another. The mortgage insurance is designed to protect the lender from the borrower foreclosure and loss of money in the resulting process.
Furthermore, private mortgage insurance offers home buyers the advantage of buying a home sooner and in some cases for a larger purchase price than they would normally be able to do. Since mortgage insurance reduces the lender’s exposure for loans greater than 80% of the property’s value, mortgage lenders are able to offer more and a greater variety of financing options for home buyers such as zero and 3% down mortgages.
Fortunately, mortgage insurance is not an expense that he/she will have to pay forever. Since Congress passed the Homeowner’s Protection Act of 1997, any loan originated on or after July 29, 1999 will have the mortgage insurance automatically cancelled once the outstanding principal balance reaches 78% of the original purchase price.
For those whose loans were written before July 29, 1999, the Federal National Mortgage Association (FNMA, also known as Fannie Mae) and the Federal Home Loan Mortgage Corporation (FHLMC, also known as Freddie Mac) have instituted policies that automatically cancel mortgage insurance once a loan is halfway through its term. In other words, once a 30 year loan reaches the fifteenth year, the mortgage insurance would be cancelled.
The amount of mortgage insurance charged to a home owner will vary. The larger the down payment, the less the mortgage insurance. Also if the loan presents less risk, the less the mortgage insurance. A 15 year loan (where the loan is repaid quicker by the borrower) has less risk and subsequently lower mortgage insurance payments than an equivalent 1 year adjustable rate mortgage (where the mortgage payment may fluctuate higher each year).
The following table illustrates common mortgage insurance percentages for common conventional mortgages:
| % down | 30 year fixed | 15 year fixed | 1 year ARM |
|---|---|---|---|
| 5% | 0.78% | 0.72% | 0.92% |
| 10% | 0.52% | 0.46% | 0.65% |
| 15% | 0.32% | 0.26% | 0.37% |
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(To be continued)