Mortgage insurance can often be an added expense for homeowners, but the good news is that in many cases, you can cancel it. Understanding the rules surrounding mortgage insurance in the US is essential for any homeowner looking to save money. Below is a comprehensive overview of what you need to know about canceling mortgage insurance.
What is Mortgage Insurance?
Mortgage insurance is primarily designed to protect lenders in case borrowers default on their loans. It is commonly required for borrowers who make a down payment of less than 20% on a home. There are typically two types of mortgage insurance: Private Mortgage Insurance (PMI) for conventional loans and Mortgage Insurance Premium (MIP) for FHA loans.
When Can You Cancel PMI?
If you have Private Mortgage Insurance, you may be able to cancel it under certain conditions:
- Reach 20% Equity: You can typically request cancellation of PMI once you've paid your mortgage down to 80% of its original appraised value or the value of the home at purchase. This shows that you have at least 20% equity in your home.
- Automatic Termination: According to the Homeowners Protection Act, lenders are required to automatically terminate PMI when your mortgage balance reaches 78% of the original value of your home, assuming your account is in good standing.
- Requesting Cancellation: To cancel PMI, you must contact your lender and provide documentation verifying your home’s current value if necessary. A home appraisal may be required.
When Can You Cancel MIP?
Canceling Mortgage Insurance Premiums for FHA loans can be a bit more complex:
- Loan Terms: If your FHA loan originated after June 2013, MIP is required for the life of the loan if your down payment is less than 10%. If you made a down payment of 10% or more, you can cancel MIP after 11 years.
- Refinancing: Many homeowners choose to refinance to conventional loans to eliminate MIP if they now have enough equity in their homes.
Steps to Take for Cancellation
To start the process of canceling mortgage insurance, follow these steps:
- Check Your Loan Agreement: Review your mortgage documents for any specific clauses regarding mortgage insurance cancellation.
- Contact Your Lender: Reach out to your lender to inquire about PMI or MIP cancellation procedures.
- Get a Home Appraisal: Prepare for a home appraisal to confirm your home’s current value, which impacts your equity ratio.
- Submit Documentation: Provide any necessary documentation to support your cancellation request.
Considerations Before Canceling
Before you proceed with canceling your mortgage insurance, consider the following:
- Market Conditions: Home values can fluctuate, so ensure that your home has maintained or increased its value.
- Financial Situation: Make sure that canceling mortgage insurance fits within your broader financial strategy.
- Tax Implications: Consult a tax professional to understand how canceling mortgage insurance may affect your tax situation.
In conclusion, it is often possible to cancel mortgage insurance in the US, especially once you've built sufficient equity in your home. By understanding the requirements for PMI and MIP, homeowners can take proactive steps to reduce their monthly expenses. Always check with your lender for the best course of action tailored to your specific mortgage type.
