If you put down less than 20 percent when you purchased your home, you probably pay for mortgage insurance every month.
For instance, a buyer with a credit score of 700, who makes a 5 percent down payment and takes out a $200,000 conventional mortgage, might expect to pay about $160 per month in mortgage insurance.
Many borrowers don't realize that eventually they will get rid of mortgage insurance premiums. They can choose to do it sooner or later.
1. SLOW & STEADY: WAIT
If you pay your mortgage on time, every time, your mortgage insurance will eventually go away on its own. The lender is required by law to terminate your mortgage insurance when the loan balance is scheduled to reach 78 percent of the original value of the home. When the time comes, the homeowner must be current on the loan.
This option may take years, and paying down your mortgage faster won't speed the process.
The law, under the Homeowner's Protection Act of 1998, only applies to home loans on primary residences. Some states have their own laws that require termination of insurance for primary and vacation homes.
Federal Housing Administration loans are not governed by these laws. But the FHA has a similar rule that terminates the insurance premium on most loans once the loan reaches 78 percent of the original value of the house or after five years, whichever comes later.
2. TAKE ACTION: PAY DOWN YOUR LOAN
If you pay down your mortgage to 80% LTV, you can ask the lender to cancel your mortgage insurance. There is no guarantee the lender will say yes.
This is absolutely different from just having 20 percent equity in the home!
Many folks think they can get rid of their mortgage insurance when they reach a level of 20 percent equity, but this us usually not the case.
Technically, borrowers can request the servicer to cancel mortgage insurance based on the current value of the home. But, generally, the borrower will be asked to wait two to five years after taking out the loan to make the request, and the lender can reject it for a number of reasons, depending on which investors own the loan.
Lenders are more likely to approve requests that are based on what the home was worth at the time the loan closed. You must have a good payment history to be approved for this request, which includes no 30-day or more late payments in the past year or a 60-day late payment in the past two years.
Even if you meet all these requirements, there may be other obstacles. For instance, borrowers with FHA loans may not request mortgage insurance cancellation. With FHA, you would have to refinance to drop the mortgage insurance.
3. TAKE CONTROL: REFINANCE YOUR LOAN
With an FHA or a conventional loan, the easiest way to dump your mortgage insurance is a refinance.
A refinance is usually a great move because you are going to do a new appraisal, and if you establish you have 20 percent equity, then you'll no longer need mortgage insurance.
If you don't have 20 percent equity but have some cash to pay down the mortgage, refinancing may still be a better option than simply paying down the existing loan and hoping the lender will approve your request to remove the mortgage insurance.
With a refinance you are in control. You get rid of your mortgage insurance and you get a lower interest rate.
With an FHA or a conventional loan, the easiest way to dump your mortgage insurance is a refinance.
A refinance is usually a great move because you are going to do a new appraisal, and if you establish you have 20 percent equity, then you'll no longer need mortgage insurance.
If you don't have 20 percent equity but have some cash to pay down the mortgage, refinancing may still be a better option than simply paying down the existing loan and hoping the lender will approve your request to remove the mortgage insurance.
With a refinance you are in control. You get rid of your mortgage insurance and you get a lower interest rate.
