Mortgage Insurance: How--And When--To Cancel It Early

June 01st, 2010

When considering a home purchase or refinance, many homeowners may be obligated to pay mortgage insurance if they do not have at least 20% down payment/equity. This may seem like a deal-breaker for some prospective mortgage borrowers, who question the wisdom of an additional, seemingly unnecessary housing expense. What many may not realize is that mortgage insurance can be cancelled after a few years–and even earlier in some cases.

Learn how to use a free mortgage amortization calculator to evaluate how much mortgage insurance may really cost you, and just when you’ll be able to cancel it.

What Is Mortgage Insurance?

Mortgage insurance is an insurance policy, paid for by the borrower, which protects the lender in the event of loan default. It is typically required for all mortgage loans with a down payment of 20% or less–and can be very useful .

There are two common types of mortgage insurance, each paid monthly:

PMI and MMI share two common prerequisites to mortgage insurance cancellation:

Calculate Private Mortgage Insurance (PMI)

Let’s say you purchase a $300,000 home with a 5% down payment for an original loan balance of $285,000 ($300,000 value times 95%). Input the following information to a free mortgage amortization calculator:

Click “Calculate” then “View Amortization,” and scroll to the required $240,000 principal mortgage balance ($300,000 * 80% LTV = $240,000). As you can see on the pop-up window chart, your mortgage balance goes below the required cancellation threshold of 80% LTV after your 102nd normal monthly payment.

Calculate FHA Monthly Mortgage Insurance (MMI)

Let’s say you purchase a $300,000 home with a 3.5% down payment for an original loan balance of $289,500 ($300,000 value times 96.5%). Input the following information to a free mortgage amortization calculator:

Click “Calculate” then “View Amortization,” and scroll to the required $234,000 principal mortgage balance ($300,000 * 78% LTV = $234,000). As you can see on the pop-up window chart, your mortgage balance goes below the required threshold after the 120th payment, or ten years.

Note that FHA also an Upfront Mortgage Insurance Premium (UMIP) of 2.25% of the mortgage amount, added to the original loan balance at closing. The UMIP cannot be ’stopped’ (since it is only paid once), but if you pay off your FHA mortgage within seven years of funding, you are entitled to a partial refund of the UMIP.

Mortgage Insurance Can Be Helpful

Mortgage insurance allows you to purchase or refinance your home with less than 20% equity–a tremendous financial advantage allowing you to take advantage of historically low mortgage rates. Unless you have a sizable down payment, or your home’s value has increased or managed to hold value through the recent housing crisis, consider it likely that you’ll need to pay for mortgage insurance on any housing transaction in the near future.

But just because mortgage insurance costs money, doesn’t mean it has to interfere with your home ownership plans. And by paying down your mortgage principal balance faster, you can accelerate the timeframe to cancel mortgage insurance–and put that money back in your pocket.

Conventional Mortgage Insurance

Also known as Private Mortgage Insurance (PMI), the policies for removing the insurance is very similar to FHA mortgages with the exceptions that the loan to value from your original property value (lesser of sales price or appraised value) is 80% and you must have made timely payments for at least two years. Using the same transaction above, but with 5% down for an original loan balance of $285,000 ($300,000 value times 95%) you can see that the time frame for removing the PMI is considerably less as you need your loan balance to reach $240,000 (80% of original $300,000 value).

Again, use the following information with an amortization calculator: $285,000 original mortgage balance, 4.75% rate and 30 year mortgage. Click “Calculate” then “View Amortization” and scroll to the required $240,000 principal mortgage balance. As you can see on the pop-up window chart your mortgage balance goes below the required threshold after your 102nd month, or about eight and a half years.

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