One of the first questions I ask someone who is interested in buying a home is ‘how much are you planning on putting down?’. This one question will tell me what type of loan program to offer and whether or not they will need mortgage insurance. Mortgage insurance started back in the 1880’s in the US and by the 1950’s it had taken it’s modern form that we see today. The modern day american mortgage insurance policy insures the first 20% of the value of the home. If the homeowner defaults on a mortgage with mortgage insurance, the lender will be made ‘whole’ by the mortgage insurance company.
Again, what is mortgage insurance?
Mortgage insurance exists not to protect you, but to protect the lender. Any time you put less than 20% down on a home you either have to pay mortgage insurance (or split the loan into two separate loans – called 80/10/10).
So, why the heck would someone get mortgage insurance?
The reason you’d get mortgage insurance is because you don’t have, or prefer not to, put at least 20% down when purchasing a home (however, some loan programs require mortgage insurance no matter how large the down payment). In essence, you are covering the extra risk the lender is taking by paying an insurance policy that makes the lender ‘whole’ if you default on the loan.
How to get rid of it?
One of the easiest ways to get rid of mortgage insurance is to refinance your current loan into a loan that does not require mortgage insurance. However, refinancing your home may not be the best scenario if the interest rate would be higher, terms would be worse, or the cost of the refinance is not economically feasible.
Another option would be to ‘cancel’ the mortgage insurance. First, you’ll need to figure out what type of loan you have:
The two most common loan types (with mortgage insurance) are:
If your loan isn’t FHA, then most likely it’s conventional. If it is conventional, you’ll need to figure out what agency underwrote the file – Fannie Mae or Freddie Mac. You can do so by checking Fannie Mae’s and Freddie Mac’s lookup site, here and here.
Once you have figured out what type of loan you have (and if conventional who underwrote it) see below on how and when you can cancel your mortgage insurance:
If your FHA Case Number was assigned on or after June 3rd, 2013 cannot be canceled unless the down payment was 10% or more.
If your FHA Case Number was assigned before June 3rd, 2013 your mortgage insurance will cancel once the loan reaches 78% of the original purchased value AND you’ve paid mortgage insurance for at least 5 years. The exception to the 5 year rule is if you have a 15 year loan, then no time minimum is required
If your loan is conventional and you have mortgage insurance, things get a bit more tricky.