What is private mortgage insurance and why do I need it? Private mortgage insurance is insurance purchased by the borrower for the lender to protect the lender in case the borrower defaults on the loan. Studies have shown that the less money someone puts down on a loan, the more likely they are to default. Whenever you get a conventional loan and have put less than 20% equity, the lender will require that you purchase private mortgage insurance or mortgage insurance (MI) for short on their behalf. A conventional loan is generally referring to loans that are not government loans and follow Fannie Mae or Freddie Mac guidelines. Twenty percent equity is either referring to a 20% down payment on a purchase or having 20% equity in your home when you refinance. It is calculated using the Loan to Value (LTV) ratio. So, if you put $20,000 down on a home purchase of $100,000, you get an 80% LTV. This is calculated as follows: $80,000 / $100,000 = 80% or Loan / purchase price or appraised value, whichever is lower.
So, if the property you are buying or refinance is worth $100,000, you will have to either put $20,000 down or you will be required to purchase mortgage insurance. Today, there are loan programs that will go up to 97% LTV. The higher the loan to value, the more expensive the mortgage insurance will be.
Mortgage Insurance is seen as a necessary evil. If you don’t have a 20% down payment, you can’t get a loan without it.
Okay, I get it. Now how do I get rid of it?
The Homeowners Protection Act o f 1998 (HPA) covers single family primary residences and allows for homeowners to request to cancel their mortgage insurance for loans that we closed on or after July 29, 1999. Sounds simple enough, but here is how it works. The lender will automatically remove the mortgage insurance once the loan balance is first scheduled to reach 78% based solely on the initial amortization schedule. This could take anywhere between 4 and 15 years depending on interest rate and term of the loan. Mortgage Insurance will only be cancelled if the borrower has good pay history.
On the other hand, you can request in writing for the lender to remove the MI once the principal has been paid down to 80% of the original purchase price or appraised value if it was a refinance. Mortgage Insurance will only be cancelled if there are no subordinate liens, the borrower has good pay history and the lender feels the property has not declined in value.
You can also request for the lender to go off the current value of your home by requesting a new appraisal of which you will have to pay for. To do this, loans need to be in place for at least 2 years. If the loan been in place for 2 to 5 years, the Loan to value must be less than 75%. If the loan has been in place for more than 5 years, the loan to value can be 80% LTV or less.
If you have mortgage insurance, contact the mortgage company that is collecting your payments and ask them what their requirements are for removing MI. These are general guidelines and a particular lender could have tighter guidelines than what is described above.
Lastly, the premiums that you pay for mortgage insurance could be tax deductable. If you refinanced or purchase a home in 2007 or after, the mortgage insurance you pay may be tax deductable depending on your adjusted gross income. As of now, Mortgage insurance is tax deductable through 2011. Consult with your tax professional to determine if you qualify.
George Beylouny is the Branch Manager for Silverton Mortgage Vinings.