Mortgage insurance is often required by lenders when a borrower is unable to make a 20% down payment on a home. This insurance protects the lender in case the borrower defaults on the loan. However, mortgage insurance can be a significant ongoing expense, adding hundreds of dollars to your monthly payment. Many homeowners wonder how to cancel mortgage insurance to reduce their housing costs once they've built enough equity in their home. The process of canceling mortgage insurance depends on the type of mortgage insurance you have, how much equity you have in your home, and the requirements of your lender. Here’s a step-by-step guide to help you understand how to cancel mortgage insurance.
The first thing you need to know is the type of mortgage insurance you have. There are two main types: Private Mortgage Insurance (PMI) and Government Mortgage Insurance. PMI is typically required for conventional loans when the borrower has a down payment of less than 20%. On the other hand, government-backed loans like FHA loans and VA loans come with their own form of mortgage insurance. Understanding which type of insurance applies to your mortgage is essential because the rules for canceling each type vary.
If you have a conventional loan and are paying PMI, you may be able to cancel it once you’ve built up at least 20% equity in your home. Federal law mandates that PMI must be automatically canceled by your lender when your loan balance reaches 78% of the original value of your home (meaning the loan-to-value ratio (LTV) is 22%). However, you can request PMI cancellation earlier if you reach 20% equity on your own, as long as you meet certain conditions. This is where understanding your home’s current value becomes important. The lender typically requires that you have paid your mortgage on time and that your loan-to-value ratio is 80% or better, which means your mortgage balance should be no more than 80% of the home’s current value.
To cancel PMI early, you’ll need to contact your lender and request it. The lender may require that you provide proof of your current home value through an appraisal. Some lenders may accept a comparative market analysis (CMA) from a real estate agent as an alternative, though this is less common. If an appraisal is required, it’s important to note that you will typically be responsible for paying the cost of the appraisal. The appraisal will determine whether your home’s value has increased enough to justify canceling the PMI. In many cases, you can also request PMI cancellation once your mortgage balance falls to 80% of the original home value, even if you don’t reach 20% equity through home appreciation alone.
If you have an FHA loan, canceling mortgage insurance is a little more complicated. FHA loans require mortgage insurance premiums (MIP) regardless of the amount of equity you have. In most cases, FHA MIP cannot be canceled if you put less than 10% down when you purchased the home. If this is the case, you must continue to pay the MIP for the life of the loan. However, if you put down 10% or more, you can have the MIP canceled after 11 years of payments. If you refinanced your FHA loan into a conventional loan with more than 20% equity, you could also eliminate the MIP through refinancing.
For VA loans, the situation is different. The Department of Veterans Affairs does not require mortgage insurance for its loans, but there is a funding fee that is charged to borrowers when they take out a VA loan. This funding fee is not the same as mortgage insurance, and it cannot be canceled. However, if you want to reduce your overall mortgage cost, refinancing into a conventional loan or a loan without the funding fee may be an option if you meet the eligibility requirements.
In some cases, refinancing your mortgage may be the most effective way to cancel mortgage insurance. If your home has appreciated significantly and your loan-to-value ratio is now 80% or better, refinancing could allow you to eliminate the mortgage insurance by taking out a new loan with better terms. Refinancing is also an option for homeowners with FHA loans who no longer wish to pay MIP. If you have enough equity and a good credit score, refinancing into a conventional loan can help you avoid the costs of mortgage insurance entirely.
Before considering refinancing, you should evaluate the costs involved, including closing costs, appraisal fees, and any penalties that might apply to paying off your current loan early. Refinancing might not always be the best option, especially if your current loan has a low interest rate or if you have other financial constraints. It’s important to work with a financial advisor or mortgage professional to assess whether refinancing makes sense for your situation.
Another factor to consider is whether your lender has specific rules or procedures for canceling mortgage insurance. Many lenders have their own internal processes for PMI cancellation, and you may be required to submit a formal request in writing. Some lenders may require that you make the request at a specific time during the year or provide additional documentation to confirm your eligibility for cancellation. Be sure to check your loan agreement and consult with your lender to ensure you follow the correct process.
In conclusion, canceling mortgage insurance can provide significant financial relief by reducing your monthly housing payments. If you have a conventional loan with PMI, you can cancel it once you’ve built at least 20% equity in your home, either through your mortgage payments or by the home’s increased value. FHA loans require more time and may not allow for cancellation until after a certain number of years or if you refinance. VA loans do not have mortgage insurance but instead require a funding fee, which cannot be canceled. The best approach to canceling mortgage insurance will depend on the type of loan you have, your home’s value, and your financial situation. Be sure to review your loan documents, speak with your lender, and explore all of your options, including refinancing, to determine the best way to eliminate mortgage insurance and lower your monthly costs.