Dropping Mortgage Insurance

November 22nd, 2010

FHA loans: you are getting a loan that is insured against loss by the federal government through mortgage insurance, you are not getting a loan directly from the federal government. It is this mortgage insurance that many people do not know how or when to get rid of.

For homeowners with FHA mortgages that pre-date June 2013, FHA mortgage insurance cancels as soon as loan-to-value reaches 78% and 60 months have passed since the loan’s inception. For everyone else after June 2013, FHA mortgage insurance for a 3.5% down payment FHA loan lasts for as long as the loan exists. You cannot drop or cancel FHA mortgage insurance. To remove FHA mortgage insurance you can try and refinance into a Conventional loan if you have sufficient equity to do so. And you have to make sure the new interest rate and any new Conventional mortgage insurance you’d be refinancing into is not a greater penalty than dropping the FHA mortgage insurance.

On a Conventional loan it is a lot easier to drop the mortgage insurance. “PMI Drop” rules may vary from lender to lender or from region to region, but in general if you have not been late on the mortgage payment in the past 12 months, and have paid mortgage insurance for at least 2 years, and the bank can get an appraisal done (the homeowner will not be allowed to pick the appraiser) showing a 75% loan-to-value, the mortgage insurance can be dropped. And if you have owned the home for at least 5 years then you would only need an appraisal showing an 80% loan-to-value.

Fannie Mae has rules for dropping mortgage insurance.

Read the Consumer Financial Protection Bureau’s take on dropping PMI on Conventional loans here and here.

And FYI, a high appraisal when you initially purchase a home will not help you in canceling the mortgage insurance right away. The rules require you to have paid the mortgage insurance for at least 2 years before you can attempt to drop it.

So keep on top of the latest sales of similar homes in your area, and do an analysis after the first 2 years of homeownership, and then every year thereafter, to see how close you may be to dropping your mortgage insurance.

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Brian Martucci is a loan officer for Capital Bank Home Loans, a division of Capital Bank, N.A. He has been in the mortgage industry since 1986 and has served in a number of roles, including loan processor, loan officer, mortgage broker, branch manager, and vice president. Brian Martucci – NMLS# 185421. His opinions do not necessarily reflect the opinions and beliefs of Capital Bank Home Loans or Capital Bank. Capital Bank, N.A.- NMLS# 401599. Click here for the Capital Bank, N.A. “Privacy Policy”.

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