While U.S. home values have steadied in 2023, increases in recent years could possibly turn into a money-saving opportunity. If you have enough equity in your primary home and made your mortgage payments on time, you may be able to cancel your mortgage insurance allowing you to eliminate thousands of dollars per year in unnecessary mortgage insurance premiums.
Understanding Mortgage Insurance
Mortgage insurance (MI) is typically required when you put down less than 20% on a home purchase. It protects the lender in case of default, but it can be an extra burden on your monthly budget.
Due to the recent surge in home prices, your property might be worth more than you think. This increase in value could mean your home equity has also risen, potentially exceeding the 20% threshold, which is key for canceling mortgage insurance.
How to Cancel Your Mortgage Insurance
The Homeowners Protection Act (HPA) provides conditions for you to request cancellation and for automatic cancellation by your lender based on the original property value.
Original value means the lesser of the sales price and the original appraised value. (If you’ve refinanced your mortgage, original value means the most recent appraised value.)
To request a cancellation under the Homeowners Protection Act (HPA) you can ask your lender in a written request to cancel your mortgage insurance when your mortgage balance reaches 80% of your home’s original value because:
- You’ve made all of your scheduled payments or
- You’ve made extra payments to reduce the principal balance ahead of schedule
- Your property value must be at least the same as its original value and
- There are no subordinate liens on your property
- You must have a good payment history, meaning you’ve had:
- No payments 60 days or more past due during the 12-month period beginning 24 months before the date your mortgage reaches the cancellation date and
- No payments 30 days or more past due during the 12-month period before the date your mortgage reaches the cancellation date
LENDER-REQUIRED CANCELLATION UNDER HPA
Your lender must automatically cancel your mortgage insurance policy, with certain exceptions, when:
- You reach 22% equity in your home based on the original property value and original amortization schedule, and
- Your mortgage payments are current
CANCELLATION BASED ON CURRENT VALUE
Outside of HPA, you can ask your lender – in writing – to cancel your mortgage insurance based on an increase in your property’s appraised value.
- You need a good payment history in this scenario, too
- If your mortgage is at least 2 years old but less than 5, you typically need at least 25% equity in your home
- If your mortgage is 5 or more years old, you typically need at least 20% equity
- Your lender will typically require an appraisal to verify your property’s new value
Please note: Your lender may have additional requirements. If your lender paid for your mortgage insurance, you cannot cancel it. These scenarios apply only to borrower-paid mortgage insurance, meaning you paid for it. By refinancing your current loan, your total finance charges may be higher over the life of the loan.
In some cases, refinancing your mortgage might be a better option, especially if interest rates are favorable. Refinancing can not only eliminate mortgage insurance but could also lower your monthly payment or change the terms of your loan.
THINGS TO KEEP IN MIND
- Cost of Appraisal: Remember, getting an appraisal will have a cost, so weigh this against the potential savings from canceling the MI.
- Lender’s Requirements: Lenders have specific conditions for canceling MI. Familiarize yourself with these to ensure you meet all criteria.
- Market Fluctuations: Keep an eye on the market. If home values dip, it might affect your equity and the feasibility of canceling your MI.
Canceling your mortgage insurance can be a great way to reduce your monthly expenses, especially in a market where home values have increased significantly. Be sure to do your homework, understand your lender’s requirements, and consider all your options, including refinancing, to make the most financially beneficial decision for your situation.