Many people do not like paying for mortgage insurance because they feel like it is an expensive waste of money. If you have less than 20% equity in your property on a conventional mortgage, you need to pay for mortgage insurance each month to insure the property in case of default. If you have an FHA mortgage, you are generally required to pay mortgage insurance for the entire life of the loan, unless you put down at least 10%.
People dislike mortgage insurance so much they sometimes wonder if there is any way they can get their mortgage insurance premiums back? After all, they have paid their mortgage on time, so why shouldn’t they get their money back? Generally, this is not possible. The reason is that the lender is taking a higher risk when you have a lower down payment and they must be reimbursed to a certain degree for taking that risk. Mortgage insurance is the price you pay for being able to buy a home with a lower down payment and lower credit score (in some cases).
People hate PMI so much, but there are simple ways to not pay it. You simply can make a 20% down payment and never worry about PMI at all. This can save you thousands of dollars per year in mortgage insurance costs. On the down side, you could be limited in your house budget if you put down 20%. On a $200,000 home, that is $40,000. This is a lot of money to save up and not everyone can do it.
If you an FHA insured loan today, you generally need to pay mortgage insurance forever with FHA. This will continue for the life of the loan, unless you put down 10%. In that case, mortgage insurance can be cancelled after 11 years.
For some people, putting down 20% for their down payment is just too much. If this is the case, you may want to look at lender paid mortgage insurance premium. With LPMI, the lender pays the mortgage insurance when the loan is closed, and the monthly cost of the mortgage insurance is eliminated. It is built into the loan cost. The lender paid mortgage insurance option can put a lot of money back in your pocket if you do not want to put down 20%. LPMI programs are generally only an option on conventional loans.
Cancelling Mortgage Insurance
Yes, you can get rid of mortgage insurance in many cases. Once you reach 20% equity with a conventional loan, you can request PMI be cancelled. Most situations will necessitate an appraisal to determine what the value of the home is so you can show the lender you do have a 20% equity stake.
With conventional loans, you will need to make a written request to the lender once you have 20% equity in the property. It will automatically come off after you reach 22% based upon the amortization schedule in your mortgage paperwork. Automatic cancellation will not happen if you get to this point earlier in the schedule. You will need to pay for an appraisal to confirm the value.
To cancel your PMI, you need to be current on your loan payments for at least the past year for the lender to listen to your desire to cancel PMI.
Overall, you may not like mortgage insurance, but it does provide you with a way to get into a home well before you have a 20% down payment saved up.