By Aaron Nawrocki, Capital M Lending
Removing Private Mortgage Insurance – The Latest Changes from Fannie Mae
As first time homebuyers re-entered the market after 2009, the percentage of mortgages with mortgage insurance increased. Mortgage insurance is an additional monthly cost that offsets the lender’s risk with down payments under 20%. Effectively, the mortgage insurance fills in the gap if the buyers’ down payment isn’t enough to protect the bank. If the lender forecloses and takes a loss through the foreclosure sale, they can make a claim on the mortgage insurance policy to offset their loss.
On conventional loans, borrowers can remove private mortgage insurance costs without refinancing. It’s a significant advantage versus FHA financing, where the mortgage insurance stays on for the life of the loan. Also, removing private mortgage insurance is typically much less costly than refinancing, and available even if interest rates are higher. However, the procedure for removing it has been unclear and not necessarily standardized across all lenders/loan servicers. In June, Fannie Mae published guidance for mortgage insurance removal.
If you’re currently paying private mortgage insurance on a conventional loan, take a look below. On all of the removal options, mortgage payments must be current and these procedures apply to owner-occupied homes.
Procedure for Automatic Termination of Conventional Mortgage Insurance – based on original value (78% rule)
- Mortgage insurance must be automatically removed (no request necessary) on the date the principal balance is first scheduled to reach 78% of the original value of the property. For example:
- Original purchase price of $400,000, mortgage insurance comes off when the loan balance reaches $312,000
Procedure for Borrower-Initiated Termination of Conventional Mortgage Insurance – based on original value (80% rule)
- The borrower must initiate the request for removal
- The lender must verify the value has not declined, using Fannie Mae’s servicing system or an appraisal
- If the above criteria are satisfied mortgage insurance must be removed (no request necessary) on the date the principal balance is first scheduled to reach 80% of the original value of the property. For example:
- Original purchase price of $400,000, mortgage insurance comes off via written request the loan balance reaches $320,000
The above have been pretty standard across the industry, but also less common. With values rising quickly, most borrowers would like to know how to use the new appraised value to document sufficient equity to remove mortgage insurance versus paying the mortgage down. Fannie’s new release clarifies the process that all servicers must use.
Procedure for Borrower-Initiated Termination of Conventional Mortgage Insurance – based on new market value
- The borrower must initiate the request for removal
- Must verify value via an appraisal or Broker Price Opinion, ordered through the loan servicer
- The mortgage must have been in place for 24 months
- If the mortgage has been in place for 61 months or more, the loan to value ratio must be under 75%
- If the mortgage has been in place 25-60 months, the loan to value ratio must be under 80%
The typical cost of a Broker Price Opinion or appraisal is $250 – $450, so if you meet the above criteria, it can be a real value proposition to remove the mortgage insurance and lower your monthly payment.
If you still have questions about removing private mortgage insurance, I’m always happy to help – feel free to give me a call at 503-445-9525 if I can be of assistance!
Aaron Nawrocki has over 20 years of direct experience overseeing mortgage and loan processes, working to provide clients the market insight and lending expertise required to make informed decisions
About Us:
Over the course of their professional partnership, Aryne + Dulcinea have helped over 200 clients prosper in their new lives. During this time, they have prided themselves in their top-notch selling abilities, with homes outperforming market standards, consistently exceeding list price while most of their listings sell in under 7 days. Whether you’re looking to buy or sell, Aryne & Dulcinea will work in collaboration to guide you in investing in your future and reaching your real estate goals.