When do your monthly mortgage insurance payments go away? The answer may not be what you think. Many believe Conventional mortgage insurance payments end when they reach the 20% equity mark. While that is true in some cases, it is not in every case. There are two methods to eliminate mortgage insurance payments (without having to refinance):
- Through your mortgage servicer OR
- By the HomeOwners Protection Act (HPA)
2 Ways to End Mortgage Insurance Payments
There are 2 different ways to get rid of that pesky mortgage insurance payment you love so much.
- Equity Based Mortgage Insurance Removal
Under this option, mortgage lenders remove mortgage insurance payments once a home has 20% equity based on it’s current market value (homeowners must request)
- HPA Mandated Mortgage Insurance Removal
The Homeowner’s Protection Act requires mortgage lenders release home-owners from having to make mortgage insurance payments when 1 of 2 criteria are met:
- Borrower Initiated: Mortgage Insurance payments are removed when the balance of a home loan equals 80% of it’s “original value” (homeowner must request)
- Automatic: Mortgage Insurance payments are removed when the balance of a home loan equals 78% of it’s “original value” (no homeowner request required)
The small detail stating that lenders can use the home’s “original value” makes all the difference. Many homeowners believe that mortgage insurance payments go away based on a home’s market value. While sometimes true, mortgage lenders do not have to release a homeowner from mortgage insurance payments based on market value.
Instead, lenders only have to use Original Value to release a homeowner from their mortgage insurance obligation. Original Value equals the original sales price or original appraised value. Whichever is of the two is the lowest.
Think of the Law as backstop. In most cases, mortgage lenders remove MI when a borrower has 20% actual equity. Furthermore, they typically base the equity calculation on current market value when a borrower requests it. However, the mortgage lender does NOT have to do this. So sayeth the law! Clients should be aware of this.
By Jeremy House