Get Rid of My Mortgage Insurance

Nobody wants mortgage insurance.  The only reason people get mortgage insurance is to provide the opportunity to buy a home without a 20% down payment.  People went as far as doing 80/20 (80% 1st mortgage and a 20% second mortgage) financing to avoid paying mortgage insurance, even if the payment ended up a little higher.  Why?  Because the second mortgage interest was tax deductible, which mortgage insurance was not.  In addition, when you pay on the second, you are at least paying a small portion of the payment towards the principal balance while mortgage insurance does not help reduce the loan balance at all.  With changes to allow mortgage insurance to be tax deductible and the elimination of second mortgage loan options, mortgage insurance has, again, become a popular means to avoiding a 20% down payment.  So, how do you get rid of the mortgage insurance on your loan?  It depends on whether you have an FHA or Conventional mortgage.  VA is not discussed, because VA has no monthly mortgage insurance to be removed.  So let’s look at the differences.

FHA

HUD has made several changes to mortgage insurance on FHA loans over the past year, but it seems they have come to a resolution on what the mortgage insurance will be for the foreseeable future.  Currently the monthly mortgage insurance cost for all FHA borrowers is .55% of the loan amount per year.  You then take that amount and divide it by 12 to get the monthly amount due with each mortgage payment.  Here is an example:

$200,000 loan amount

.55% Monthly Mortgage Insurance = $200,000 X .55% (.0055) = $1,100/yr

$1,100 Yearly Mortgage Insurance divided by 12 months = $91.67/mo

FHA does have some unique considerations when it comes to mortgage insurance.  Typically, with Conventional mortgage financing, if you put 20% down you do not have to pay mortgage insurance.  FHA does not follow this same rule.  No matter how much you put down on a FHA mortgage, monthly mortgage insurance will be required for a minimum of 5 years.  If you are able to put 20% down, Conventional financing will be the way to go.  The only reason you may go with FHA compared to Conventional with 20% down, is due to the more lenient guidelines FHA has compared to Conventional.  Another consideration is that point in which mortgage insurance must be removed.  With FHA financing, monthly mortgage insurance is required to be removed once the current mortgage balance compared to the original purchase price is 78%.  Let’s look at an example:

$200,000 purchase price

$197,700 loan amount (based on calculations including down payment and financing up-front mortgage insurance)

$200,000 (original purchase price) * 78% (the point MI is required to be removed) = $156,000

This means that as soon as the mortgage balance hits $156,000 through normally monthly payments or pre-payment on your mortgage, the monthly mortgage insurance payment will be removed.  If you make your minimum payments each month, with no additional principal payments, with the example above, it would take 152 months (12 years and 8 months) to get to that point.

Conventional

Conventional mortgage insurance is obtained through private mortgage insurance companies and each have their own rules, rates and guidelines.  Your lender should be able to assist you with this.  I pulled up the rates for Mortgage Insurance in the Denver, Colorado Metro area and the rate for a 5% down Conventional mortgage is .94%.  The method for completing the calculation is the same as with FHA.  Here is the same example, this time for Conventional Mortgage Insurance:

$200,000 loan amount

.94% Monthly Mortgage Insurance = $200,000 X .94% (.0094) = $1,880/yr

$1,880 Yearly Mortgage Insurance divided by 12 months = $156.67/mo

Now that we understand the difference between the monthly premiums on FHA and Conventional mortgage options, what are the differences in when it can be removed?  Conventional has the same requirement as FHA does at the 78% mark of the original purchase price compared to the current mortgage balance.  Conventional offers some additional options for the removal of mortgage insurance that FHA does not. Conventional, unlike FHA, will consider the difference between the current market value and the current mortgage balance.   Here is an example to explain.

$200,000 original purchase price

$190,000 original loan amount (based on 5% down)

After 5 years of minimum payments the loan balance would be $177,861

Assuming a 3% appreciation rate, after 4.5 years, the value would now be $231,855

$177,861 (current balance) divided by $231,855 (current value) = 76.7%

With this example, the borrower could request that the conventional mortgage lender complete a property appraisal (at the borrower’s cost) to determine if they agree with the value.  Assuming the point of 78% has been reached between the current value and the current balance, the borrower may request that the MI be removed.  The mortgage lender is not required to remove the MI until the point mentioned above, however does have the authority to remove it, if they choose.

Why wouldn’t a Conventional mortgage lender remove it at the point the current balance compared to the current balance is at 78%?  My theory is that they anticipate that the value would go down and/or you might default.  To eliminate that risk, the lender may require the mortgage insurance continue to be paid until a greater gap is achieved or values are continually going up.

Hopefully, now you understand the differences between mortgage insurance on FHA loans compared to Conventional loans as well as when the mortgage insurance can be removed.  Another option, of course, would be to refinance once you have 20% or more equity in the home.  Consider the costs of refinancing when determining whether this options makes sense.

Lending a Hand,

Scott Wynn