Tuesday, February 3, 2009

When Can I Cancel Mortgage Insurance?

We are often asked when a borrower is no longer required to pay mortgage insurance. For a conventional (non-government) loan, a borrower can request that the mortgage insurance (MI) premiums be cancelled when they have 20% equity in the property. If a borrower requests the cancellation, then they have to prove that they actually do have 20% equity. That means they will need to pay for an appraisal. They also need to have a good payment history (no 30-day late payments in the past 12 months, and no 60-day late payments in the past 24 months).

The lender is required to cancel the MI once the equity gets to 22%. They will use the amortization schedule for the loan to determine when the borrower has 22% equity.

If the borrower has purchased a house at a below-market price and has an appraisal showing that they have 20% equity, they will still probably have to pay MI for at least a year. That determination is up to the lender.

FHA rules are a little different. For an FHA loan, the MI gets cancelled once the borrower has 22% equity. However, regardless of the equity, a borrower must pay MI for a minimum of 5 years with an FHA loan. This is one reason it makes no sense for a borrower to get an FHA loan if they are making a large down payment (15% or more).

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