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Find Out How Mortgage Insurance Can Be An Expense That You Can Eliminate |
By Dave Clocker
 On some loans, Mortgage Insurance (MI) can be added to the monthly dues and made a part of it when the loan balance is over 80% of the value of the home at the time of purchase.
Let's say the homeowner bought a home for $200,000. They put 10% down ($20,000) and obtained ONLY one loan that covered the remaining 90% of the property value ($180,000). Because they now have a 90% loan balance to the value of the home (LTV), there is Mortgage Insurance premium that is tacked onto the monthly mortgage payment. This mortgage insurance is intended to protect the lender in the event that the borrower doesnt pay the mortgage fully, all along, they at least have collected some funds to recoup their losses.
Well fast forward in time. Lets imagine it is a couple of years later and the house has experienced good appreciation and now has some equity. The homes original market value was $200,000, but it is now at $240,000. This would yield an LTV of 75%. Under this circumstance when
the LTV is 80% or lower, you would expect the MI to be removed. At this point, can the homeowner contact the bank and request the Mortgage Insurance (MI) to be REMOVED? Under what qualifications would the bank have to remove the MI?
Many people, like a friend of mine, are experiencing this situation and do not know the facts.. Sandra has a conventional loan with a bank. Last week, she contacted the bank and made this request to remove the MI from her home. She told the representative that the LTV is now at 80% or less. However, the bank informed her that the MI cannot be removed. The bank rep stated that the LTV is NOT based off the Current Market Value but it is based off the Original Purchase Amount? What are the facts regarding when the insurance qualifies to be removed?
The rep went on to say that since the Original Purchase Price was $200,000 and the Loan Amount is $180,000, the Current Loan amount has to be 80% of the $200,000, which would mean she would have to pay down her loan to $160,000 (80% LTV). Why would the request for removal of the MI be based off the Original Purchase Amount? As far as I have understood it, it should be based off the Current Market Value.
Whether using the Original Purchase Amount or the Current Market Value as the yardstick that the MI waiver is measured by, an appraisal is a part of this process. Can the homeowner select his/her own appraiser or does it have to be one chosen by the bank? I see there is a conflict of interest here if it is up to the bank to select the appraiser as they would want to bring in a lower value. The sticky issue is that if the bank is the one ordering the appraisal, then would the appraisers be biased in favor of the bank?
This brings us to the next question of when the appraisal fee would be paid. Can the homeowner get an evaluation estimate from the appraiser before proceeding with the full appraisal report? In the interest of saving money, it would be better to pay for the appraisal knowing that it will bring in the needed value to accomplish the objective of getting the MI removed.
No doubt as you are reading this that these thoughts have crossed your mind about your MI. Based on my findings, most loan documents tell the client that they can request the MI to be removed when the LTV is under 80%. So as long as the current loan amount is less than 80% of the current appraised value of the home, you would be able to remove MI. It should not come as a surprise that the only time the bank will remove this insurance on their own accord is when they are required to so by law. They need to remove it when the loan drops under 78% of the purchase price.
This MI insurance has different rules for removal that are dictated by your loan type. For example, on an FHA loan you cannot request the FHA Mortgage Insurance to be removed unless the loan amount from the original purchase price has gone down by 20%, thus having an 80% LTV. At that point you can remove the FHA Mortgage Insurance. FHA loans use this conservative approach and will not let the bank re-appraise the property and go off a new home value. However, on Conventional Loans the MI is more temporary and can be eliminated at an earlier time if the new appraised value qualifies.
For the conventional loans, a new appraisal has to be ordered to confirm the new value, and the bank is the one who will choose the appraiser, not the borrower. It is always a good idea to call an appraiser you trust and have them comp out the property first. That way you will have a good idea if the banks appraiser will come in with the value you need. The banks appraisers tend to be very conservative mainly because they have a certain set of guidelines that they need to follow. As long as the appraised value comes in, though, you should be able to remove the MI.
Overall, each bank has their way to structure the loan documents as they desire, so you have to carefully read the loan paperwork, it spells it out in every case.
There is an element of uncertainty in trying to get the MI removed from your record, so if the rate on your loan is presently not very good, one way you can get rid of the MI is to just refinance with another bank with the new appraised value. Who knows, if you threaten to refi elsewhere and youve been very good at making your monthly payments on your existing loan, it just may happen that the bank will give you a break and eliminate the MI so you wont move your loan elsewhere.
There is an even better side to real estate than you may be aware of. Dave Clocker is a real estate investor who will teach you the Little Known Facts That 99% Of The People Will Never Know About How To Almost Magically Build Streams of Income Thru Real Estate. He has taken these creative strategies and combined them into content-packed videos, insider reports, and interviews with experts. Check more out at http://www.RealEstateWayToWealth.com
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