When to Petition Your Mortgage Servicer to Cancel Unnecessary PMI Payments

You have to make it happen, because they won’t.  Federal law requires many mortgage providers to remove PMI under some circumstances. Some lenders may also allow for PMI to be removed, according to their own standards. Standards for getting PMI removed from a mortgage have been established under the Homeowners Protection-Act. The law provides two major ways for you to get rid of PMI:

  • Request that PMI be cancelled
  • Automatic PMI cancellation

When you have a conventional loan, you have the right to ask your mortgage servicing company to cancel mortgage insurance when you have reached the point on your mortgage schedule where the balance falls to 80% of the home’s original value. The date should be provided to you when you first get the mortgage on a PMI disclosure form. If you are unable to locate the form, you can ask your mortgage servicer for a copy.

You can request PMI be cancelled at an earlier date if you made higher payments that have reduced your mortgage balance to 80% of the original value.

This also could occur if the home has appreciated significantly in value since you have bought it. If you want to cancel PMI because of home appreciation, you may need a new appraisal to show the lender that you have reached 20% equity in the home.

There are other criteria you must meet if you want to cancel PMI. First, you must ask the lender in writing. Second, you must have a solid payment history and be current. If you have not made payments on time in the past 12 months, it is unlikely the lender will allow you to cancel PMI. Also, the lender may require you to prove you do not have a second mortgage on the property. Last, the lender may ask you show a current appraisal that shows the value of the home has not dropped.

Even if you do not ever ask the lender to cancel PMI, it still must terminate mortgage insurance on the date that your loan balance falls to 78% of the home’s original value. For mortgage insurance to be cancelled on this date, you must be current on mortgage payments. PMI will not otherwise be cancelled until payments are up to date.

There is another way you can get rid of PMI. If you are current on mortgage payments, the lender must end PMI the month after you are 50% through the loan’s amortization schedule. For a 30-year mortgage, this would be at the 15-year point. This standard is more likely for people with an interest only period on the loan, a forbearance or a balloon payment. In this case, you still must be current on monthly payments.

Keep in mind that your loan servicer may have other PMI cancellation policies that could include provisions beyond what is in federal law. But the guidelines may not restrict the rights that federal law gives you. For instance, the act does not have requirements for how long the loan has to have been in effect before you can request cancellation of mortgage insurance.

What About FHA?

FHA financing is another matter. These loans are secured by the Federal Housing Administration. FHA mortgages written after June 2013 cannot generally have mortgage insurance cancelled. The federal government changed the rules in 2013 to shore up the reserve fund for FHA, so most FHA loan holders must pay mortgage insurance for their entire loan term.

One exception is a loan where at least 10% was put down for a down payment; these loans can have mortgage insurance cancelled after 11 years. If you have an FHA loan and have 20% equity, you may not be able to cancel mortgage insurance. The best option in this situation is to refinance into a conventional mortgage. This should be possible if you have a credit score in the 640 range.

Takeaways on PMI Cancellation

The bottom line on cancelling PMI is that the rules have been laid out very specifically in federal law so that mortgage companies cannot force you to pay PMI longer than necessary. The lender can legally decline to deny your request when you are at 20% equity. But, if you have made payments on time, the mortgage provider MUST under federal law automatically cancel PMI when you have reached 78% loan to value. Ask your mortgage company if they have any no-PMI mortgages that are priced competitively.

But before that, you will probably need to contact the mortgage provider in writing for them to consider removing PMI at 80% loan to value.

Of course, you can avoid PMI entirely if you put down at least 20% on your home. But this is challenging for many Americans, especially first-time buyers who lack equity.

 

References: https://www.consumerfinance.gov/ask-cfpb/when-can-i-remove-private-mortgage-insurance-pmi-from-my-loan-en-202/

Reasons to Avoid FHA When Refinancing Your Mortgage

If you have past credit trouble and a lower down payment, you may consider an mortgage insured by the FHA. The Federal Housing Administration is popular as they have low down payments, reasonable interest rates, and very flexible qualification criteria. However, no loan is perfect, and FHA mortgage have some disadvantages both with new loans and for refinance.

Nobody wants to pay mortgage insurance every month, but new requirements for FHA, mandate borrowers being required to permanently pay mortgage insurance unless they refinance out of a FHA insured mortgage.

Below are some of the down sides of an FHA mortgage for new purchases and refinancing.

Mortgage Insurance Is Expensive

This is probably the biggest negative of the FHA loan. Borrowers who use this home loan for a refinance will usually have to pay for mortgage insurance. Mortgage insurance protects the lender if you default on the loan. Mortgage insurance for FHA programs are more expensive than that for conventional loans. There are two types of mortgage insurance you must pay:

  1. Up front mortgage insurance premium that is 1.75% of the loan amount.
  2. Annual premium that you pay each month as part of the loan; typical amount is .85% of the loan amount.

These premiums may be added to the loan, so you have lower out of pocket costs. But your monthly payment will be higher, and this adds up over the years.

You also must pay for mortgage insurance with a conventional loan, but that premium goes away after you reach 20% equity. That brings us to another reason to not refinance into an FHA loan.

Mortgage Insurance for Life of Loan

One of the biggest downsides of the FHA loan program currently is that it generally requires mortgage insurance for the life of the loan. You could be paying for mortgage insurance when you have 90% equity in the home! The reason for this is FHA found that its emergency funds were getting lower than federal law allows, so permanent mortgage insurance was passed in 2013. If your loan was written after June 2013 and you put down than less than 10%, you will have to pay for mortgage insurance for the entire loan. This might be a good deal for the FHA emergency fund, but it is a rotten deal for the homeowner.

This policy is why many FHA lien holders refinance OUT of an FHA loan and into a conventional mortgage when they have 20% equity. If you refinance into an FHA mortgage, just know that you could be paying for mortgage insurance for a long time.

Some Property Restrictions

FHA is overseen by HUD. HUD has strict rules about the type of home you can buy. You will not be able to buy a vacation home with an FHA program, or refinance a vacation home. There also is a strict appraisal process where the HUD approved appraiser visits the home to ensure it meets all requirements.

HUD also has exact requirements for condos. Unfortunately, many condos cannot be approved by FHA at all. If you want to refinance your condo loan through FHA, you need to have a condo project that is on HUD’s approved list.

Sellers Sometimes Dislike FHA

If you are buying a new home and want to use FHA for financing, you may find yourself at the back of the line in terms of offers. Some sellers do not like FHA mortgages because they have the impression that the agency is hard to deal with. Some real estate agents may steer sellers away from FHA offers because the appraisal process is thought to be more difficult. This is not really the case, but the perception is out there.

Years ago, sellers also had to pay some of the buyer’s closing costs. This is no longer true. Buyers with an FHA lien can cover their own closing costs.

No Reward for Good Credit

FHA loans have low rates. The problem is that everyone gets the same interest rate even if you have excellent credit. Over the life of the loan, you could be paying more than you should. Also, is it fair for someone with a 620-credit score to have the same rate as a person with a 740 score?

Lower Loan Ceiling

FHA has limits on the loans it will insure based upon the area of the country. Some of these limits may be more restrictive than you like. In a more expensive area, you may find that you cannot get the home that you want because it is more than the FHA maximum for your area.

The bottom line on FHA financing for buying and refinancing is that they work for some people who have lower incomes and credit scores. But people with higher scores and incomes may be better of with a conventional loan. Also, remember the requirement for mortgage insurance with FHA loans. Paying that for the life of the loan is an expensive proposition.

 

References: https://twocents.lifehacker.com/the-drawbacks-of-buying-a-home-with-an-fha-loan-1740669336

Should I Ever Get a Mortgage with PMI?

2018 is still looks like a good time to buy a home with less than a 20% down payment. More than ever in the last several years, mortgage lenders are offering low down payment loans, with loan approval rates markedly higher than 2010.

For buyers who have less than 20% to put down, though, you need to think about private mortgage insurance or PMI. In most cases, PMI is required on all conventional loans with less than 20% down. PMI is a required insurance policy for conventional loans that insures the mortgage lender against loss if you default.

PMI differs from the mortgage insurance needed on other loans, such as FHA mortgages. Mortgage insurance on FHA loans can be costly as the premiums are higher than Fannie Mae and Freddie Mac. There also is a separate mortgage insurance program for USDA home financing.

Many Americans hate the idea of paying PMI. But is PMI good or bad? It is neither, really. Mortgage insurance IS an extra monthly cost, but it helps millions of people qualify for a loan years before they otherwise could. Only a small percentage of Americans can afford to put 20% down on a home, and it is even smaller for first time home-buyers. Let’s consider both sides, the home loan that requires mortgage insurance and the no PMI mortgage.

Should you ever get PMI with a mortgage? There are cases where it does make sense to choose a home loan with mortgage insurance.

When PMI Is Required

PMI is needed when the buyer puts less than 20% down on a conventional loan. Conventional loans are backed by Freddie Mac or Fannie Mae and are available through major home lenders such as Wells Fargo, Bank of America and JPMorgan Chase, etc.

To understand why PMI is needed on a loan with less than 20% down, it helps to review the mortgage default situation. The homeowner is not making payments on the home, and at least three payments were missed. This is creating a big loss for the lender. But state laws often delay when the homeowner can be evicted. It might be one or two years before the home can be reclaimed. During this period, the home could have damage, such as neglect, fire or flood. It probably is showing the effect of poor maintenance.

When the home is sold in a foreclosure auction, it probably means the lender has a big loss on its hands. On average, lenders lose about 20% of the value of the property during the default and foreclosure. So that is why it is a requirement to put down 20% to avoid PMI. Anything less than 20% down is a risk to the lender. PMI protects them against that loss.

Types of Private Mortgage Insurance (PMI)

There are three major options for paying for PMI. The first is the single premium option that means you are paying a lump sum when you close the loan. This will cover the cost of PMI for the entirety of the mortgage.

The second option is lender paid mortgage insurance or LPMI. This does not require you to make monthly insurance payments but your rate will be increased by the lender to cover the risk.

The third option is monthly premium PMI which is how most of us pay for it. The annual cost of your PMI policy is split into 12 payments and collected monthly.

All of these options have advantages. If you plan to stay in your current loan for a long time and expect home prices to stay flat or go up moderately, you may want to opt for the single premium plan. But if you want to move or refinance in a few years, you may want LPMI. This means you are only paying the slightly higher rate for a limited period.

For most buyers, monthly PMI is probably the best bet. Payments are monthly and will cancel once you reach 20% equity through payments and/or appreciation.

Cancelling PMI

A lot of buyers think PMI is stupid and a waste of money. But it lets you buy the home with much less than 20% down. Do you have other things you could do with that money? Most people do. You could use some of that money to pay for repairs on the home, keep an emergency fund or put into investments. Access to PMI lets more people buy homes, and in particular, lowers entry barriers for the first-time homebuyer who has no equity.

PMI does add to your monthly payment, but that is ok for most people. They can afford PMI payments; what they cannot often afford is a 20% down payment.

Plus, once you have paid down the balance to 78% of the home’s original purchase price, you can have the PMI cancelled automatically by law. You also can ask the lender to cancel it once you reach 20% equity, but they may wait until 22% equity.

To qualify for PMI cancellation, you have to have made your payments on time. Otherwise, the lender may balk at cancelling PMI.

Overall, getting a mortgage with PMI makes sense for people who would struggle or find impossible putting 20% down on a home, especially first-time buyers.

 

 

 

 

 

 

Why Is FHA Mortgage Insurance Forever?

FHA mortgage insurance, known as MIP (Mortgage Insurance Protection) is an insurance policy that protects the lender if you default on the mortgage. MIP allows the lender to issue mortgage loans that require small down payments and at very low interest rates. MIP reduces risk to the lender, and this allows the lender to issue mortgage to people who might not otherwise qualify for a loan.

The FHA mortgage holder pays for the MIP up front and as part of their monthly mortgage payment. After mid-2013, most FHA mortgage loans are required to pay MIP for as long as they hold their mortgage with FHA. By making people pay for mortgage insurance premium even after they have 20% equity, the Federal Housing Administration has been able to bolster its reserves to ensure it has enough money available in case people were to default en mass. But there are ways that you still can get rid of mortgage insurance. Below is more information about FHA mortgage insurance premium and how you may be able to cancel MIP. Ask about no PMI loan opportunities.

How Long Does MIP Last with FHA Mortgage Programs?

Loans from FHA are in two categories: those that have case numbers before June 3, 2013, and those that have case numbers after that date. Being able to cancel MIP or not depends upon the date the loan was issued and other factors. For FHA loans that were issued on or after June 3, 2013:

  • 20-30 year loan with less than 10% down: MIP is life of the loan
  • 20-30 year loan with more than 10% down: MIP can be cancelled after 11 years
  • 15 years or less loan with less than 10% down: MIP is life of the loan
  • 15 years or less with more than 10% down: MIP can be cancelled after 11 years

For loans that were issued before June 3, 2013:

  • 20-30 year loan with less than 10% down: 78% LTV, MIP can be cancelled
  • 20-30 year loan with 10-22% down: 78% LTV, MIP can be cancelled
  • 15 year loan with less than 10% down: MIP may be cancelled after five years
  • 15-year loan with 10-22% down: With 78% LTV, MIP can be cancelled

Most FHA lien holders have loans that were opened after June 2013, had less than 10% down and were for 30 years. In these cases, you cannot cancel MIP. But that is not the end of it. Once you have gotten to 80% or so LTV, that is, you have at least 20% equity, you can refinance out of an FHA loan into a conventional loan with no mortgage insurance.

The price of homes has gone up considerably in the last three years. A home that you put down only 3.5% or so in 2014 could have enough equity to allow you to refinance with no PMI.

Why People Choose FHA Loans and MIP

A major advantage of conventional mortgages is mortgage insurance is cancelled automatically when you reach 78% loan to value. As we have made clear above, this is not usually the case with FHA mortgage insurance. So why do so many people choose an FHA loan with MIP?

FHA loans are easier to qualify for. It is possible to have a 3.5% down payment with only a 580 FICO score. If you get a conventional loan, you may have to have at least a 640 FICO score and put more money down. It also is possible to get an FHA loan with only a 500 FICO score. FHA loans are popular with people who had serious financial problems in the past, such as a bankruptcy or foreclosure. But as long as you are on a stable financial footing in the last one or two years, you should be able in many cases to get an FHA loan. The FHA loan is one of the most popular loan products in America today for people with below average credit scores.

Also, FHA MIP is significantly cheaper than conventional PMI for people who have credit scores below 700. For example, FHA MIP costs $71 per $100,000 borrowed regardless of your credit score. But with a 680 FICO, conventional PMI costs $44 more per $100,000 financed. Thus, mortgage insurance is a better deal for people with lower credit scores on an FHA loan.

Refinancing Out of an FHA Program

Still, if you have 20% equity in the property, there is no reason you should pay MIP forever with an FHA mortgage. It is strongly recommended when you have 20% equity to refinance to a conventional mortgage. You should find a lender who specializes in these types of refinances.

Paying for MIP with an FHA loan is not a cheap thing, but it is often a good deal until you have 20% equity in the property. After you have that much equity, you are strongly advised to have your credit score at a point where you can refinance into a conventional loan. There is no reason to pay for MIP for the entire life of the loan.

lender paid mortgage insurance

Lender Paid Mortgage Insurance vs FHA

People who want to buy a home with less than 20% down have plenty of options in 2018. But doing so will usually require you to pay for mortgage insurance. Called PMI for conventional loans and MIP for FHA financing, mortgage insurance is one of those expenses of life you may not like but is necessary for many people. Mortgage insurance is there to reimburse the lender if you fail to pay your loan and default on it. The lender is paid back some of the loan amount. This lowers their risk on lending to people who put less than 20% down. Unfortunately, mortgage insurance can cost more than $1000 per year and sometimes much more, depending upon the size of the loan, type of loan, and your credit.

Let’s Compare FHA MIP to Lender Paid Mortgage Insurance

If you are putting down less than 20%, one of your options instead of paying mortgage insurance each month is to use lender paid mortgage insurance or LPMI. With this program, you will pay a bit higher interest rate each year for the pleasure of not paying mortgage insurance. You can expect to pay an interest rate that is .5% more than the regular rate that other mortgage products offer. But there are several things to think about if you are going to possibly get lender paid mortgage insurance.

On the plus side, you will enjoy a lower mortgage payment each month. Your payment will include your principal, interest, homeowner’s insurance and property taxes, but no mortgage insurance. This will put at least $100 or $200 more in your pocket every month – not a bad deal.

Second, you are having to put less money down on your home. This is especially important for first time home buyers who are not bringing equity to the table from another property. Paying a higher rate for LMPI can make sense in many situations, and it is allowing you to buy a home with a fraction down of what is usually required. That money can be used for fixing up the home or other things.

On the down side of LMPI, you will pay a higher interest rate. Expect to pay at least .5% more and sometimes more than that. This will add up over the years of the loan to be a lot of money. If you plan to stay in the house for 10 years, you will be paying a higher rate the entire time. But if you are going to sell the home in five years, paying a higher rate may make sense for the pleasure of not paying monthly mortgage insurance. Many experts say putting down 5% or less and staying in the home less than 10 years can make sense for paying LPMI.

Also, the economy in early 2018 is doing well, and interest rates are on the way up. We already are seeing rates in the mid 4% range. This means that a mortgage with LPMI tacked on is going to cost you more. If you plan to stay in the home for a long time, you may have difficulty refinancing to a lower rate later because you are paying the higher LPMI rate. The other disadvantage of paying LPMI is that you will pay more if you have average credit below 700. You can however buy points when you close the loan and lower the rate.

LPMI will be with you for life if you decide to stay in the home for 20 years, so keep that mind. LMPI generally is a good option for people who are not making their current house their permanent home.

Other Low-Down Payment Options

If you are unsure if you want to have the higher rate of LPMI, you can consider other government backed loan products that allow only a 3.5% down payment for many people. One of the most popular programs is the FHA loan. This program requires a mere 3.5% down payment for a 580-credit score. FHA loans carry mortgage insurance as well, but this allows you to pay a lower rate than you can usually get in a conventional loan.

Note however that you will probably have to pay for mortgage insurance for at least 11 years if you put down 10% or more, and for the life of the loan if you put down less than that.

Mortgage insurance with FHA loans costs more than with conventional loans. So, you could end up with a payment that is more than with LPMI, even though FHA loans generally carry a lower rate.

The Skinny on LPMI and FHA

LPMI can be a good option for buyers who want to stay in the home for 10 years or less. Beyond that, you will be paying mortgage insurance when you already have 20% equity. Your only option is to refinance that loan, so you no longer are paying the higher LPMI interest rate.

FHA loans can be a desirable choice if you want to put little money down because you will have a very low interest rate. FHA mortgage insurance is still with you though, and often for the life of the loan. So, you would also need to refinance out of the loan to get rid of mortgage insurance. But FHA loans are great for people with lower credit scores as you can get a rate well below market. So deciding which one to choose depends upon your finances, credit and long term plans for the home you are buying.

References: Learn About Lender Paid Mortgage Insurance (LPMI). (n.d.). Retrieved from https://www.thebalance.com/learn-about-lender-paid-mortgage-insurance-lpmi-315657