When to stop paying mortgage insurance?

How long do you have to pay mortgage insurance? The Orange County Register pointed out an insightful blog by mortgage broker Dennis C. Smith of Stratis Financial in Huntington Beach:

“Many of our mortgages include mortgage insurance, both conventional mortgages with less than 20% down and FHA mortgages which are a major part of the industry these days. With the elimination of the piggy-back mortgage products that allowed home buyers to purchase with less than 20%, and in many cases no money down, and avoid mortgage insurance by having a 1st Trust Deed, or mortgage, at 80% loan to value and a 2nd Trust Deed for the balance of the purchase price — with these no longer available we must use mortgage insurance, also known as MI.’’

Smith offers these guidelines for when you can stop paying it:

“For conventional mortgages Private Mortgage Insurance (PMI) is used to insure mortgages with less than 20% down. In the current market many regions of the country labeled ‘Declining Markets’ by Fannie Mae/Freddie Mac have limited availability for mortgage insurance with less than 10% down, and many insurers not insuring hi-balance mortgages over 90% loan to value or condos over 90% loan to value. But if you do have PMI on your mortgage the basic guideline is you must have the insurance for a minimum of two years, all your payments must have been made on time and your loan balance must be at or below 80% of the lesser of the original purchase price or appraisal at the time of the loan.

“In the old days….It used to be that if you could provide your lender with an appraisal showing the market value of your home has increased enough that your current mortgage balance was 80% of the home’s value the lender would rescind your mortgage insurance. Not anymore. Now the actual balance of the mortgage must be reduced to 80% of the original value of the home when you purchased the property or obtained the loan.’’

He gives this example:

“Property value = $450,000; mortgage amount = $405,000 (90% loan to value), in two years you have remodeled your home, taken it from the dog on the block to the nicest and the value is $500,000, plus you have paid down about $10,000 in principal so your loan balance of $395,000 is 79% loan to value. Can you remove your MI? Nope, your current balance of $395,000 is 87.8% of the original value of the home. Your MI will stay in place until your mortgage balance is $360,000, 80% of the original $450,000 value.’’

To go to the article on Orange County Register’s page, click here.  Dennis Smith’s blog is located at www.denniscsmith.com

Renee West
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Renee West

Broker Associate at Villa Real Estate
I'm a real estate broker associate in Newport Beach & Corona del Mar, CA, with Villa Real Estate.
Contact me at (714) 914 9060 or rwest@villarealestate.com for all your real estate wants and needs.
Renee West
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