Can I Change My Mortgage Insurance Policy?

Many homeowners pay mortgage insurance as part of their monthly obligations, often without fully understanding its function or whether it can be removed. Mortgage insurance protects the lender against financial losses if a borrower defaults, allowing lenders to offer mortgages to individuals with smaller down payments. This article explains how mortgage insurance works, the conditions for cancellation, the steps to initiate the process, and other available options.

Understanding Mortgage Insurance

Mortgage insurance protects the lender in case of loan default. If a borrower stops payments and the property sale doesn’t cover the loan, it helps the lender recover losses. This protection is typically required with down payments less than 20% of the home’s purchase price, resulting in a higher loan-to-value (LTV) ratio, which lenders consider a greater risk.

The type of mortgage insurance depends on the loan. Private Mortgage Insurance (PMI) is for conventional loans, usually paid monthly. For government-backed loans like FHA, borrowers pay a Mortgage Insurance Premium (MIP), which includes an upfront fee and an annual premium. VA loans do not require mortgage insurance but have a one-time funding fee. Lenders must provide disclosures about mortgage insurance at closing and annually, outlining borrower rights regarding cancellation.

Criteria for Cancellation

Mortgage insurance cancellation depends on the loan type and accumulated equity. For conventional loans with PMI, the Homeowners Protection Act (HPA) of 1998 sets clear rules. PMI automatically terminates when the loan balance reaches 78% of the home’s original value, based on the amortization schedule, provided payments are current. This automatic cancellation also occurs at the loan’s midpoint if sooner.

Homeowners can request PMI cancellation once their loan balance reaches 80% of the home’s original value. This requires a written request to the loan servicer and a good payment history (no payments 30+ days late in 12 months, or 60+ days late in 24 months). The servicer may also require confirmation that the property’s value has not declined and that there are no subordinate liens, which might necessitate a new appraisal.

FHA MIP cancellation rules differ. For FHA loans originated on or after June 3, 2013, MIP is generally required for the entire life of the loan if the initial down payment was less than 10%. If the down payment was 10% or more, MIP can be canceled after 11 years. For FHA loans before June 3, 2013, annual MIP can typically be canceled once the loan balance reaches 78% of original value and the loan has been in effect for at least five years for 30-year mortgages. A good payment history is essential for any MIP removal.

Initiating the Cancellation Process

To initiate mortgage insurance cancellation, contact your loan servicer. Homeowners should have their loan number readily available. The servicer will typically require a formal written request. If cancellation is based on an increase in the home’s value, the servicer will likely require a new appraisal to confirm the current property valuation.

If an appraisal is necessary, the loan servicer will arrange for an approved appraiser. Homeowners should avoid ordering their own appraisals, as the servicer may not accept them. The cost of this appraisal, typically ranging from $400 to $700, is generally the responsibility of the borrower. After all required documentation and the appraisal are submitted, the servicer reviews the request. If approved, mortgage insurance payments will cease.

Exploring Other Options

For homeowners not meeting direct cancellation criteria, several alternatives exist. Refinancing is a common method. If a homeowner has significant equity (LTV 80% or less), refinancing into a new conventional loan can eliminate mortgage insurance. This is attractive if current interest rates are lower, potentially reducing monthly payments. FHA loan holders can also refinance into a conventional loan to remove MIP if they meet LTV requirements.

Another option is Lender-Paid Mortgage Insurance (LPMI). Here, the lender pays the premium, but the cost is incorporated into a slightly higher interest rate. While this removes a separate monthly payment, the homeowner pays the cost over the loan’s life, and LPMI typically cannot be canceled without refinancing.

Making additional principal payments on a conventional loan can accelerate equity building and reach PMI cancellation LTV thresholds sooner. Even small extra payments can reduce the loan balance faster, enabling earlier PMI cancellation. This strategy is most effective for conventional loans with PMI, as FHA MIP rules are tied to specific timelines or require refinancing. If other options aren’t feasible, continuing payments until automatic termination is the standard course.