Tag: Mortgage Insurance

The Market in Focus: Removing Private Mortgage Insurance

Posted on by Aryne + Dulcinea
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.

The Market In Focus: New Rules for Removing Mortgage Insurance

Posted on by Aryne + Dulcinea
By Aaron Nawrocki, Capital M Lending

If you took a conventional mortgage out over two years ago and put less than 20% down – it could be a great time to look at lowering your mortgage payment by removing mortgage insurance. Mortgage insurance is in place to protect banks against loss should a mortgage go unpaid. Twenty-percent equity is typically required as a cushion in case of default, and mortgage insurances serves to make up the difference in cases of smaller down payments. This additional cost increases the overall monthly mortgage payment.

Historically, homeowners have removed mortgage insurance and lowered their monthly payments refinancing. Unfortunately, interest rates have risen over the last twelve months, making refinancing less cost-effective. The good news is that conventional mortgages allow homeowners to remove mortgage insurance without refinancing. They can deal directly with their current loan servicer and follow an administrative process to eliminate the monthly cost.

The challenge is that, while there were general guidelines that most banks followed, the requirements and method for removing mortgage insurance varied. If a mortgage loan was sold or transferred, the terms for taking off the mortgage insurance could change, making it difficult for lenders and homebuyers to plan for future removal. Fortunately, Fannie Mae developed rules for mortgage insurance removal which will apply across all loan servicers. These rules should make it easier for homeowners to reliably determine when they can lower their monthly payments.

Here are three ways for effectively removing mortgage insurance, assuming on-time payments for 24 months:

Automatic Termination – when the mortgage is paid down to 78% of the original value

  • If a homeowner pays his/her note down to 78% of the original value, the mortgage insurance terminates with no action required by the homeowner.
  • No fee can be charged by the servicer and the mortgage insurance must be removed on the date the principal balance of the mortgage loan is first scheduled to reach 78% of the original value of the property.

Requested Mortgage Insurance Termination Based on Original Value – when the mortgage is paid down to 80% of the original value

  • Once the principal balance reaches 80% of the original value of the property, the homeowner can request termination of the mortgage insurance – it doesn’t happen automatically.
  • The servicer is required to run the property through Fannie Mae’s Automated Valuation Model to confirm the value hasn’t declined. If the AVM doesn’t confirm the original value, the homeowner can order an appraisal through the servicer to confirm the value is the same or higher than when the loan was originally taken out.

Requested Mortgage Insurance Termination Based on Current Value – using an increase in appraised value.

  • Now it gets tricky. The biggest change is the quantification of how long the mortgage must be in place before a value increase can be used to remove mortgage insurance.
  • Homeowners can’t use market appreciation until a two-year payment history has been established.
  • If the mortgage has been in place less than two years, the increase in value must be supported by documentation of improvements.
  • If the mortgage has been in place between two and five years, the appraisal must document that the mortgage is no more than 75% of the appraised value.
  • If the mortgage has been in place over five years, the appraisal must document that the mortgage is no more than 75% of the appraised value.

With the way Portland values have risen in the last five years, it’s a great time to look at removing mortgage insurance to lower your mortgage payment. If any of the above scenarios fit your situation, reach out to your current mortgage servicer and ask them to send you their written procedure for its removal. If you have any questions, I’m always happy to help!

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.