Is it Necessary to Refinance to Eliminate Private Mortgage Insurance?
In short, the value of the property must exceed the loan balance by 20% due to additional payments made such that the principal balance has been reduced to 80% and the request has been made in writing to eliminate the Private Mortgage Insurance (PMI).
The answer depends on a few factors. If the loan type is a conventional mortgage and had a greater than 80% loan to value and was closed on or after, July 29, 1999 the following applies per the Homeowner Protection Act as discussed by the Consumer Finance Protection Bureau (CFPB):
“The Homeowners Protection Act gives you the right to request that your lender cancel PMI when you have reached the date when the principal balance of your mortgage is scheduled to fall to 80 percent of the original value of your home. This date should have been given to you in writing on a PMI disclosure form when you received your mortgage. If you can’t find the disclosure form, contact your lender. You can also make this request earlier if you have made additional payments to reduce the principal balance of your mortgage to 80 percent of the original value of your home.”
- The payment history must be good and the payments current.
- Your request must be in writing to the proper address in an acceptable format such as the RESPA letter.
- The lender/servicer may require you to provide an appraisal to prove the value of the property has not declined below value when the loan was funded. Note: This is not to prove that your home value has appreciated.
- The lender/servicer may require you certify that there are no junior liens (second mortgage, HELOC, judgment or tax liens).
- Send a QRM your servicer if you are unable to locate the PMI disclosure form you received at closing.
- If you do not contact your servicer to eliminate the PMI, the PMI is to automatically drop off once the loan has been paid down to 78% of the funded loan.
Click here for the CFPB link on eliminating PMI.
Click here for the August 4, 2015 CFPB update for mortgage servicers.
If you have Lender Paid Mortgage Insurance (LPMI) the only way to eliminate LMPI without selling the property is to refinance. As always, this is a business decision. How much will you save in what period of time by eliminating the LPMI. It’s worth noting that LPMI may be tax deductible (check with your tax advisor to make sure).
Is it Necessary to Refinance to Eliminate FHA Mortgage Insurance Premium?
If the loan is an FHA Insured mortgage it has Mortgage Insurance Premium (MIP). For mortgages with an FHA case number assignment date on or after June 3, 2013, the FHA monthly mortgage insurance can only be terminated by the servicer or holder if the mortgage is paid in full before the maturity date. The exception to this rule is the FHA Streamline Refinance.
Again generally speaking, providing accelerated payments were made such that the unpaid principal balance is 78% or less of the original loan balance, the MIP can be eliminated prior to the originally scheduled cancellation date. For several years prior to the change implemented on June 3, 2013 the mandatory time for the MIP was 84 months.
In short, if you wish to eliminate the MIP prior to the termination date of the MIP, as explained by the CFPB, you’ll find it necessary to refinance.
Can You Refinance to Eliminate Mortgage Insurance?
Providing the property has sufficient equity to eliminate PMI or MIP (20% equity) and there are no junior liens (above discussed), the mortgage loan may be refinanced into a conventional loan eliminating the PMI or MIP. As always, this is a business decision. How much will you save over what period of time by eliminating the PMI or MIP. Next calculate your costs in purchasing another first mortgage. Remember, there is no such thing as a free lunch.
If You Are Being Solicited to Refinance Here’s a Suggestion:
Before investing the time and expense of applying for a refinance, make sure the solicitor is in fact both an NMLS Registered Loan Originator as well as Licensed by the CO Division of Real Estate or, the state in which you reside; if they are, obtain their NMLS Number and their CO License Number as well as their contact information. If they are neither, they are merely a lead generator and get paid only by the number of leads they generate. This doesn’t mean that which they are selling can’t be done; it just means you may wish to be extra vigilant as they may not have your best interests at heart.
A licensed mortgage loan originator has a much higher level of interest in helping to protect your interests. Therefore, you may wish to avoid the lead generator altogether. Discuss your refinance possibility with your State Licensed, NMLS registered loan originator.
The Bottom Line: Before You Pay For an Appraisal
Make sure you are dealing with someone licensed and make sure it makes business sense prior to shelling out several hundred dollars for an appraisal. With the refinance there will also be many more hundreds or perhaps several thousand dollars in new costs to purchase a new mortgage. Not insignificant is how many more months or years the refinance will add to your total cost. Consider as well how long you really will keep the house on which you are contemplating the refinance.
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Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct. This information is not legal advice and is for guidance only. You may use this information in whole and not in part providing you give full attribution to James Spray.