How to cancel mortgage insurance

canceling mortgage insurance

Mortgage insurance is one of those obligations all owners face if they apply for a loan without a 20% deposit.

Its purpose is to protect your lender from the possibility, no matter how remote, of you defaulting on your loan.

Potentially, this would leave them with a property that may not be resellable at market value. It’s a sensible protection, but unfortunately you must pay for the coverage.

Once you are established in the property, it is a good idea to watch the equity levels in your mortgage.

If and when you surpass 20% equity, you should talk to your lender about canceling the coverage. This will give you additional monthly cash to either accelerate payments on your home loan, probably the smartest thing to do right now, or enjoy life a little more.

Canceling mortgage insurance requires that you meet specific criteria with your lender and follow their process. The steps you need to take will depend on your lender’s rules and the type of insurance that has been taken.

Typically, there are two types of mortgage insurance. 

A Private Mortgage Insurance (PMI) is the most common policy. If you took out a conventional loan with less than a 20% downpayment, you would more than likely be paying the dues monthly with your mortgage payment.

Anyone with a Federal House Association (FHA) loan will likely be paying for a Mortgage Insurance Premium (MIP). Regardless of the size of your down payment, an MIP is an obligation of an FHA loan.

These basic steps will help you understand how to cancel a policy.

The rules

Review your mortgage documents to see under which conditions you can cancel the policy. The ability to get out of the deal may depend on issues such as your loan-to-value ratio (LTV), consistent repayment history and even a minimum period of the policy. 

Equity threshold

You may need a loan-to-value ratio of 80%-20% to cancel. Some lenders insist on 75%-25%. Again, refer to your mortgage documents to determine your situation.

Take action

If you want to see the back of this policy, ask your lender to re-appraise the value of your home. 

Formal request 

Once it’s established that you no longer need mortgage insurance, contact your lender or broker and put the cancellation in play. Unfortunately, there will be a few forms to fill out. Ensure you follow every step of your lender’s instructions to avoid refusal.

Always check

Even when your submission has been successful, you should double-check that this money is no longer coming out of your bank account.

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