Now may be the time to dump your mortgage insurance

Gary Sandler | Real estate connection

According to the National Association of Realtors 2020 report on Down Payment Expectations and Homeownership Barriers, the median down payment in 2019 was 12 percent for all buyers, 6 percent for first-time buyers, and 16 percent for repeat buyers. The median is half above this percentage and half below this percentage. NAR also found that "over 70% of cashless first-time home buyers - and 54% of all buyers - have made down payments of less than 20% in the past five years".

Twenty percent, or 20 percent equity in a property, is a benchmark that is often quoted by lenders and mortgage experts because from that point on mortgages must be insured against losses due to borrower defaults. While the borrowers are paying the mortgage insurance premiums, the lender is protected by the insurance. A good rule of thumb is that the lower the percentage of the deposit, the higher the premium. The premiums are usually between 0.5 and 1.5 percent of the loan amount per year. For example, a 1.5 percent premium on a $ 150,000 mortgage would add $ 62.50 to the first month's payment ($ 150,000 x 1.5% ÷ 12 = $ 62.50). A few cents are deducted from each consecutive monthly premium when the principal amount on which the percentage is based is reduced.

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So how do you get your mortgage insurance? The answer depends on the type of loan. VA and USDA loans do not have mortgage insurance per se, but they do require one-time upfront payments to cover defaults. The VA calls it a funding fee. USDA refers to their version as a guarantee fee. In no case can one-off payments be refunded.

All FHA loans come with mortgage insurance, which consists of both an upfront fee and a monthly fee. For borrowers who received their FHA mortgage before June 3, 2013, mortgage insurance will be lapsed if the loan balance is reduced to 78 percent of the original mortgage amount as long as the loan is at least 5 years old. For borrowers who received an FHA loan after June 3, 2013 and cut less than 10 percent (the minimum is 3.5 percent), the premiums will remain for the life of the loan. Borrowers who lay down more than 10 percent can cancel with 78 percent or 5 years, depending on the original loan term.

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There are two ways to cancel mortgage insurance for conventional loans: automatic cancellation and buyer-requested cancellation. Automatic cancellation begins when the loan balance reaches 78 percent of the original loan amount. However, borrowers can request that the insurance be canceled at 80 percent of the original amount. In some cases, lenders will allow termination of a mortgage insurance policy if the loan balance is 75 percent or less of its current estimated value as long as the loan is at least 5 years old, according to Michael Carol, account manager at Mortgage Guarantee Insurance Corporation. This is a boon for homeowners whose home value has grown significantly over the years. The option is only available for Freddie Mac or Fannie Mae owner-occupied mortgages. The final decision to cancel insurance rests with the loan service provider.

The loan service provider is the company that collects monthly mortgage premiums on behalf of the owner of the mortgage. Borrowers who believe they are eligible to cancel their mortgage insurance just need to contact the servicer who will collect their payments. There are numerous other facets of cancellation options under the PMI Cancellation Act passed by Congress in 1998 https://files.consumerfinance.gov/f/documents/102012_cfpb_homeowners-protection-act-hpa-pmi-cancellation-act_procedures.pdf. Checking out can be key to canceling your mortgage insurance and putting hundreds of dollars in your pocket every year.

See you when you close!

Gary Sandler is a full time real estate agent and owner of Gary Sandler Inc., Real Estate Agent in Las Cruces. He is happy to answer questions and can be reached at 575-642-2292 or Gary@GarySandler.com.

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https://businessservicesnews.ca/2021/04/26/now-may-be-the-time-to-dump-your-mortgage-insurance/