Growing up, I would play Monopoly about once a week. Mr. Monopoly seemed to have all the money in the world, even if it was just in the form of colored paper.

Sadly, the overwhelming majority of us do not grow up to be Mr. Monopoly. We may do well, but we won’t be buying islands in the Bahamas any time soon.

Because we don’t lie on a vast throne of gold and gems, many of us don’t have a 20% down payment when it comes time to buy a house. The good news is you can still make the purchase. You just have to pay mortgage insurance.

Mortgage insurance is helpful in the sense that it gives you a lot more buying power. It can also be annoying, because it’s an additional item tacked on your mortgage payment every month.

The goal of this post is to give you some clarity around if and when you can get rid of your mortgage insurance. In some cases, it even goes away on its own.

First, we’ll go over some factors affecting whether you can get rid of your mortgage insurance and when you can do it. After that, we’ll look at how these factors interact with each other in practice to help you determine whether or not you can say “hasta la vista, baby!” to your mortgage insurance.

Factors Affecting Your Mortgage Insurance Removal

There are six factors that affect whether your mortgage insurance can be removed: the type of mortgage insurance involved, who holds your loan, the loan-to-value (LTV) ratio, the property type, the age of the loan and whether or not your property value has increased.

Types of Mortgage Insurance

Before we go any further, there are two types of mortgage insurance to define: private mortgage insurance and mortgage insurance premiums.

If you pay mortgage insurance on a monthly basis on conventional loans, that’s called private mortgage insurance (PMI).

You pay mortgage insurance premiums (MIP) on FHA loans. You pay a portion of the premium upfront at the close of the loan and then continue to make payments on a monthly basis.

This post focuses on both PMI and MIP, in order to see whether you can eliminate your monthly payments.

Who Holds Your Loan?

The next thing you need to know is who’s invested in your loan. Fannie Mae and Freddie Mac have different policies regarding when mortgage insurance can be eliminated. Depending on the age of your loan and the amount of your down payment, MIP may or may not be removable from FHA loans.

If you don’t know whether your conventional loan is held by Fannie Mae or Freddie Mac, you can use their lookup tools. Here’s one for Fannie and one for Freddie.

Loan-to-Value (LTV) Ratio

Maybe the most important aspect of whether your mortgage insurance can be canceled is your loan-to-value (LTV) ratio. Put simply, your LTV measures the amount of equity you’ve built up in your home. The number signified by the ratio is the percentage of your home value you still have to pay off.

For example, if you’ve paid off 20% of your home value between the down payment and monthly installments, your current LTV would be 80%.

Your LTV also goes down as your property value goes up because it’s based on your property value, not the loan amount.

Property Type

The requirements for removing PMI also vary depending on the type of property you have. We’ll get into specifics later on. For right now, the important thing to know is that removing mortgage insurance on a one-unit primary or vacation home is easier than taking it off multi-unit primary properties or investment homes.

Age of the Loan

In some instances, the age of the loan is a determining factor in whether mortgage insurance can be removed. This especially comes into play when trying to remove FHA MIP. It also sometimes makes a difference when you’re trying to remove PMI due to a gain in equity caused by an increase in your property value.

Property Improvements

If you’ve made substantial property improvements that cause increases to the value of your home, you’ll need to get a new appraisal to substantiate the improvements. Depending on the age of your loan, it may also change the amount of equity needed to remove the mortgage insurance.

Now that we know the factors that affect whether or not your mortgage insurance is eligible to be canceled, let’s see how these things interact with some real-world examples.

Canceling MIP

MIP cancellation is the easiest scenario to take a look at. Unfortunately, the reason for this is that it can’t be canceled in many cases.

If your loan closed on or after June 3, 2013 and you had a down payment of less than 10%, MIP will never be removed. With down payments of 10% or more, you still have to pay MIP for 11 years.

If your loan closed before that date, things are a little better. On a 15-year term, MIP is canceled when your LTV reaches 78%. For longer terms, the LTV requirement remains the same, and you have to pay MIP for at least five years.

Conventional PMI

Conventional loans are the most flexible type of loan, allowing borrowers to purchase the greatest range of properties. However, this variety means there are a lot of variables that come into play in determining when mortgage insurance can be canceled.

One-Unit Primary Residence or Vacation Home

If the residence is your single-family primary home or second home, your mortgage insurance will be canceled automatically in either of the following scenarios, whichever happens first:

• The LTV reaches 78% (and you didn’t make extra payments to get it there)
• You reach the midpoint of your mortgage term (15 years on a 30-year mortgage, for example)

To give these numbers some context, if you had a 10% down payment at a rate of 4.0%, you’ll reach 78% LTV after 81 months. The same scenario with a 5% down payment would take 104 months. The auto cancellation occurs as long as you’re current on your payments.

If you don’t want to wait for it to auto cancel, you have some options. If your LTV reaches 80% through payments, you can request cancellation.

Fannie Mae allows you to make extra payments on the balance in order to get down to 80% faster, while Freddie Mac doesn’t.

If you’ve made home improvements to increase your equity by increasing your property value, Fannie Mae requires that you have 75% or less LTV before they will take off mortgage insurance. Freddie Mac leaves the requirement at 80%. All improvements have to be called out specifically in a new appraisal.

If you’re requesting removal of your PMI based on natural increases in your property value between two and five years after your loan closes, both Fannie Mae and Freddie Mac require a new appraisal, and the LTV has to be 75% or less. If your removal request comes more than five years after your closing, the LTV can be 80% or less with a new appraisal. These requirements apply to insurance removal based on market value increases not related to home improvements.

Multi-Unit Primary Residence or Investment Property

If you have a multi-unit primary residence or investment property, things are a bit different. With Fannie Mae, mortgage insurance cancels halfway through the loan term on its own. Freddie Mac does not auto-cancel mortgage insurance.

You can cancel PMI on your own when LTV reaches 70% based on the original appraisal with Fannie Mae. Freddie Mac requires 65% for cancellation.

The requirements for Fannie and Freddie are the same if you want to have a new appraisal done to show a lower LTV. This is true whether the lowered LTV is based on a natural market-based increase in home value or home improvements. Please keep in mind that you must have had the loan for at least two years prior to requesting PMI removal on your investment property.

Note on Cancellation

There are a couple things to know about mortgage insurance cancellation. In order for mortgage insurance to auto-cancel, you have to be current on your payments. If you want to request a cancellation yourself, you can’t have had a 30-day late payment in the last year. You also can’t have had payments more than 60 days late in the last two years.

Help Sheet

I realize I just threw a ton of information and random numbers at you. In order to better help you figure out which situation applies to your loan, we’ve put together a sheet that should help you out.

To begin with, here are the requirements to remove PMI from conventional loans.

Click the images below to enlarge.

There are some stipulations regarding how and when PMI can be removed.

FHA loans have very specific requirements for when MIP can be removed.

Hopefully this post has helped make more sense out of your mortgage insurance. Still have questions? Ask in the comments below!

Posted by: Carlson Mortgage – a St. Louis mortgage broker providing home loans in the state of Missouri. We are ranked as the #1 lender in Missouri on Zillow.com. We can be reached at (314) 329-7314 seven days a week. Let us be your source for some of the lowest mortgage interest rates in St. Louis on conventional, FHA, Veterans (VA), USDA, Jumbo and condominium (condo) financing. We have 11 years of experience providing home loans and mortgage services in St. Louis that are tailored individually to your unique needs and to your financial situation. Our loan officers speak English, Spanish and Russian. Call us today to inquire about home loan interest rates, to get pre-approved for a purchase or a refinance mortgage, or if you have any general mortgage lending questions.

Read the original article here