When can I stop paying for mortgage insurance?
You can typically stop paying for mortgage insurance once your loan is paid down to 78 percent of the original value. In theory it should automatically cancel, but there are situations where it could take somewhat longer or even considerably shorter than that.
The fact is, mortgage insurance didn’t always automatically cancel, and borrowers didn’t always know they could cancel it, either. Way back in the early and mid-1990s, millions of homeowners came out to refinance loans and discovered that they'd been paying for mortgage insurance long after their growing home equity and regular amortization made it unnecessary.
While they may have been happy to discover they no longer needed MI, many were not pleased that there was no mechanism in place to notify them that they no longer needed it -- let alone some way to cancel it. While some lenders did allow borrowers to challenge the need for MI, for many the only way out was to get a new loan by refinancing.
These unhappy borrowers found an ally in Jim Hensen, a Utah congressman who had his own problems canceling PMI on his Beltway condo. His travails led to the eventual passage of the Homeowner Protection Act (HPA).
Made law in 1998 and effective in July 1999, HPA mandates annual notification to eligible borrowers that their policy can be cancelled. It also spells out the conditions under which a PMI policy can be cancelled automatically -- typically, when the original loan balance is paid down to 78 percent of the original value of the home, based upon the original payment schedule. However, this sunset provision covers only those loans originated after July 29, 1999. Earlier loans have no such automatic cancellation.
Of course, this doesn’t apply to delinquent borrowers. With a less-than-stellar payment history, especially in the last year or two, you may have to wait a while. The law states that in the 12 months leading up to the automatic cancellation, the borrower can have no payments which were more than 30 days overdue. In addition, in the past 24 months leading up to the auto-cancel, the borrower can have no payments which were 60 or more days past due.
If there are late payments in the borrower's payment history, they will have to wait until consecutive "late-free" periods are built, or until the loan is paid down to a 77 percent LTV level.
There has always been an informal borrower-lender relationship with regards to PMI cancellation, provided you knew you had PMI and were aware that it could be cancelled at some point. If you didn't, you simply paid PMI until you refinanced or the loan was paid off. Now, however, HPA requires that at least once per year, the lender must notify you that your PMI may be cancelled, provided certain conditions are met. This applies to single-family principal residences only.
Getting to 78 percent: Amortization and appreciation
Two factors work in your favor when it comes to building enough equity to cancel your PMI:
- Amortization -- the process of paying off your mortgage -- is a slow, steady, but guaranteed process
- Appreciation (a.k.a home price inflation), however, is a fickle, unpredictable process which can quickly bring gains in an active housing market, but can also cost you equity in periods of economic downturns
How long will it take to get to an 80 percent LTV ratio, through amortization alone? Simply put, it will take years.
As an example, a $90,000 loan ($100,000 purchase price, i.e. 10 percent down) with a 30-year term at 4 percent results in a monthly payment of $477.42. (Note: the higher your loan’s interest rate is, the longer it will take to reach the 80 percent LTV level).
In the early years of your mortgage, most of your payment is comprised of interest, so you barely make a dent in the principal you owe.
Starting loan amount: $90,000
You won't reach a remaining balance of $80,000 (80 percent) where you can request cancellation of your MI until the 69th payment, late in the fifth year. Amortization is truly the slow and steady way to build equity. For a 15-year term, the period is cut to less than three years, since you’re paying down the outstanding principal much faster.
However, inflation/appreciation can greatly accelerate your equity stake. Compare the amortization above with 1 percent price appreciation to see how much more quickly you'll get to 80 percent:
Loan starts at $90,000
End of year 1, $88,415
x 1% = $101,000
End of year 2, $86,765
x 1% = $102,010
End of year 3, $85,048
x 1% = $103,030
End of year 4, $83,262
x 1% = $104,060
End of year 5, $81,402
x 1% = $105,101
End of year 6, $79,467
x 1% = $106,152
With just 1 percent appreciation and regular, timely payments, you might be able to cancel your PMI as early as the end of year four, instead of somewhere in the fifth year. Of course, greater levels of appreciation speed up the process, and declining home values in your area would prolong it.
How soon can I cancel my mortgage insurance?
Our interpretation of the HPA law -- and Fannie Mae's position -- is that a borrower holding a loan with less than two years of seasoning and solid payment history would find it difficult, if not impossible, to have their PMI cancelled, regardless of local market appreciation, unless they have significantly accelerated their payments in some way -- by prepaying, for example, or in an instance where the homeowner has done a considerable amount of home improvement – and even then will need to be at a 75 percent LTV ratio, verified by a full appraisal of the property.
If you’re interested in the full, actual text of the HPA law, you can find a copy on the FDIC’s website at http://www.fdic.gov/news/news/inactivefinancial/1999/useftp.pdf-- but a fairly plain-language version can be found in the FDIC’s compliance manual at http://www.fdic.gov/regulations/compliance/manual/pdf/V-5.1.pdf -- where all of the rights and responsibilities of the lender or servicer are spelled out.