Here’s All You Need to Know About Getting Rid of Mortgage Insurance

 In First-Time Home Buyers, Refinancing your Mortgage

Mortgage insurance is an insurance policy that allows you to get a mortgage with less than 20% down.  You, as the borrower, pay for it. If you don’t pay your mortgage and the lender forecloses of your property, the mortgage insurance company pays the lender so the lender doesn’t lose any money by selling your house for less than you owe them.  This hardly seems fair, unless you realize that before mortgage insurance existed, you always needed 20% down to buy a house.

The biggest question people have about mortgage insurance is when does it go away?

With a conventional loan (a non-government loan), you pay mortgage insurance if you have less than 20% down.  It goes away automatically when you have 22% equity in the house, based on the original amortization schedule.  It doesn’t go away automatically if your house goes up in value, or if you make extra payments. It only goes away automatically when you have 22% equity based on the original amortization schedule.  At the closing, you receive a disclosure that tells you the date.

If your house does go up in value, or you make extra payments, you will have more equity in your house sooner than the date when the mortgage insurance is scheduled to go away.  In that case, you can request that the lender drop the mortgage insurance once you have 20% equity in the house. However, the lender is not obligated to remove it until you reach the date shown in the disclosure (the date you have 22% equity).  Most of the time, the lender will remove it if you can prove that you have 20% equity, you have been paying for insurance for at least a year, and you don’t have any late payments, but they don’t have to remove it.

If you get an FHA loan, the rules are different.  With FHA loans, everyone pays mortgage insurance, regardless of how much money you put down.  Even if you put 90% down, you would still pay insurance with an FHA loan.

If you put less than 10% down on an FHA loan, the mortgage insurance lasts for the life of the loan, and the lender will not remove it, no matter how much equity you have in the house.  If you put 10% or more down, it will go away after 11 years with an FHA loan.

VA loans do not have mortgage insurance, even if you put no money down at all.  If you are a veteran, you should always get a VA loan, especially if you have less than 20% down.

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