You are required to get mortgage insurance if you can only put down less than 20% of your mortgage as a down payment. Mortgage insurance can help you buy a house that you might not have been able to afford by reducing your initial expense, but you’ll probably want to have that removed as soon as you can. There are two ways to cancel your mortgage insurance: using the original value of the property or using the current value of the property.
Using the Original Value
The Homeowners Protection Act of 1998 (HPA) regulates when mortgage insurance can be cancelled for single-family primary residences. HPA covers both borrower-requested cancellation and lender-required cancellation.
If you request cancellation, you must provide a written request to the lender who holds your existing mortgage, who will cancel your insurance policy. You can request cancellation on one of two dates: the date that the loan balance reaches 80% of the original value of the property, or the date that the loan balance was scheduled to reach 80% of its original value, based on the initial amortization schedule – regardless of the actual outstanding balance.
Mortgage insurance can only be cancelled if you have a good payment history AND you satisfy any requirements that the property value has not declined and that no subordinate liens exist.
If the lender requires cancellation, the policy must automatically be cancelled on the date that the loan balance is scheduled to reach 78% of its original value based solely on the initial amortization schedule AND you are current on your balance required by the terms of the mortgage.
Note: Different cancellation requirements may apply if your loan is designated as high risk.
Using the Current Value
HPA does not cover mortgage insurance cancellation based on a property’s current value, so the cancellation terms may vary based on your investor. Your best bet is to talk with your mortgage banker to find out the exact details of your loan, but sometimes you can remove your mortgage insurance if you have your house reappraised and your home increases in value.
Fannie Mae and Freddie Mac typically require a few things. This process must take place at least two years after your loan originated, you must have an acceptable payment history, and either your loan-to-value ratio is 75% or lower based on the current value (if less than five years have elapsed since your loan closed) OR your loan-to-value ratio is 80% of its current value (if more than five years have elapsed).
For example, let’s say you bought a house three years ago for $300K. While you were living there, property values went up and you did some work around your house. After getting the house reappraised, the value of the property went up to $350K. With an acceptable payment history, if the balance on the mortgage is less than $262,500, you would qualify to remove your mortgage since your loan-to-value ratio is below 75%.You must provide a written cancellation to your lender and you must provide an acceptable current value estimate, but this can be a good way to remove your mortgage insurance if your house has increased in value.
Keep in mind that mortgages have different regulations depending on the lender, so reach out to your mortgage banker if you have any questions. But if you qualify, cancelling your mortgage insurance can be a great way to reduce your mortgage payments and put more of your payments into the value of your home.