MI Removal Notice Letters
A reader once wrote in The Mortgage Reports asking: “My wife and I received MIP expulsion letters. Is this a scam? »These MI deletion letters are fairly common. So it’s good to know what they are all about.
Chances are, your letter will not be an outright scam. This will most likely be part of a refinancing marketing campaign. But whether this is a good idea depends on your circumstances.
Read on to find out if you should accept the offer or throw it straight for recycling.
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About Mortgage Insurance: PMI and MIP
There are two main types of mortgage insurance:
- Private Mortgage Insurance (PMI) required when reconciling loans with a decline of less than 20%
- Mortgage Insurance Premium (MIP) required on all FHA loans, regardless of the down payment
The time homeowners have to pay for mortgage insurance – and options for canceling it – depends on their current mortgage type and loan balance.
You will want to fully understand how your Mortgage Insurance (MI) coverage works before deciding what to do with this MI deletion letter.
Here’s what you need to know.
How PMI works
PMI stands for Private Mortgage Insurance. This applies to almost all conventional loans with a down payment of less than 20%, including matching loans secured by Fannie Mae and Freddie Mac.
With PMI, you can stop paying premiums when your current mortgage balance falls below 80 percent of the market value of your home at that time. Once this happens, your loan to value ratio will be 80% or less. And that’s the equivalent of having a 20% down payment or higher.
At the time this was written, home prices were skyrocketing. According to the data, in the period from March 2020 to March 2021, they grew by an average of 11.2% across the country. Basic logic…
With this significant increase in home equity, many borrowers are finding that they receive the equivalent of a 20% down payment much sooner than they expected. Thus, ordinary loan holders may be eligible to cancel PMI even if they bought their homes very recently.
How FHA MIP works
MIP is a mortgage insurance premium. This type of MI is required by the FHA for all FHA loans.
If you invest less than 10 percent, the MIP will last until the end of the loan term. Unlike regular PMI, FHA mortgage insurance does not drop when you hit 80% LTV.
FHA borrowers who pledge 10% or more find it a little easier. Their MIP falls after 10 years.
USDA loans also require mortgage insurance, which cannot be canceled. Only VA loans secured by the US Department of Veterans Affairs are not eligible for monthly mortgage insurance.
The biggest disadvantage of FHA and USDA loans is that their MIP requirements are valid for the entire term of the loan. And there is no MI delete option for them.
Your only way to avoid MI if you have the equivalent of a 20% down payment is to refinance into a regular loan without PMI.
There is one exception. But vanishingly few borrowers are likely to be able to take advantage of this. If your FHA loan was received before June 3, 2013, you can cancel your MIP. If this applies to you, ask your mortgage agent about your MIP removal options (this is the company you make monthly payments to).
Return to these MI delete notification emails
This is where the MI deletion letters appear.
If you bought a home with a USDA loan or an FHA loan with less than 10% payment, you can never waive your mortgage insurance obligations.
Regardless of how well the MI deletion letter is written, understand that you are being invited to refinance a different type of mortgage.
Of course, this could be a great idea. Refinancing into a regular loan for MIP withdrawal can be a great way to lower your monthly mortgage payments and save money.
But keep in mind that the sender’s motivation is to get their hands on some of your refinancing costs. Therefore, you need to make sure that refinancing is really for you. And you need to look for the best refinancing deal – don’t just go to a company asking about your business by mail.
How to remove FHA MIP safely
If the principal balance of your mortgage is 80% or less of the market value of your home, you can refinance your regular loan and cancel the MIP payments.
Keep in mind that you will need to meet the basic requirements to get a regular mortgage. Usually this:
- Credit rating 620 or higher
- Two-year history of stable income and employment
- Debt-to-income ratio below 43 percent
When refinancing, you will also have upfront closing costs.
Refinancing costs roughly the same as what you paid for your existing mortgage loan, often around 2-5% of the new loan amount.
You can get your lender to cover your upfront costs by paying a slightly higher mortgage rate. Or you can invest them in your new mortgage, which means that you will pay them back with interest over the life of the new loan.
How do you know if your LTV is 80% or less?
The loan to value ratio is based on the appraised value of the property. And, as the adjective suggests, this is determined by the judgment of a professional appraiser.
So how can you determine the present value of your home before trying to refinance?
One way is to look at current ads in your area. But don’t forget that these are just asking prices. It is not known what the seller will actually receive.
You can also search many websites for recently sold homes. But the most useful tool can be Trulia’s U.S. Appraiser Records and Other Public Property Information… Understand your local area and select the latest sales in your area.
Basically, you are trying to find what real estate agents call “comps” (comparable). And they can give you a good idea of how much your home is worth.
Of course, the value of your home will likely differ depending on factors such as square footage, number of bedrooms and bathrooms, and any renovations you may have done since the move.
But looking at the bills should give you a rough idea of how much local homes are worth and whether you might have enough capital – based on your appraised value and current mortgage balance – to remove the MIP.
What is the FHA-SR Program?
IN FHA Refinancing Optimization (FHA-SR) is a great way to get a lower mortgage rate and monthly payment. It’s faster, cheaper and easier than standard refinancing.
If you’re eligible for a significantly lower mortgage rate than what you’re currently paying, Streamline Refi might seem like an easy task.
But there are two things the FHA-SR cannot do.
First, Streamline Refinance cannot remove MIP… If you want to get rid of your mortgage insurance, you will have to refinance your regular or qualifying loan.
And secondly, you cannot use one of them to refinance with a cash advance. If you want to withdraw money from your home, you will have to do standard refinancing on either another FHA loan or a different type of mortgage.
Cancellation of Private Mortgage Insurance (PMI)
Remember that PMI is payable on regular home loans, including those from Fannie Mae and Freddie Mac.
If you own one of these, your lender should automatically cancel your PMI when your LTV reaches 78 percent. In other words, when you have the equivalent of 22% down payment. Thus, you may not need to cancel PMI yourself.
You can also ask your lender to manually cancel when your LTV drops to 80 percent. But you need to complete your request several months before you reach that number.
How do you know if you are eligible for PMI removal?
Call your mortgage service (number on your most recent mortgage statement) and request a PMI schedule. But please note that the schedule is based on the original cost of your home: the purchase price you paid.
If you think your home is currently worth significantly more, you can request a new valuation. And given the recent rise in home prices, you’re likely to be right. Keep in mind that a new estimate will likely cost you $ 300-500.
PMI removal rules
You should know three rules for stopping PMI based on the new estimate:
- You must have owned a home for at least two years.
- If you own a home for 2-5 years, you can only stop paying PMI when your LTV drops to 75%.
- Only if you have owned a home for at least five years can you stop paying with 80% LTV.
Your next steps
So now you know. If you have an FHA or USDA loan and receive a MI removal letter it says refinancing to a regular loan.
This can be a great way to save on monthly bills. And if you can lower your interest rate at the same time, you can save thousands over the life of the loan.
Just make sure to be smart about refinancing. It is imperative to choose the best mortgage rate and lowest fees.
If you think you are eligible for refinancing, get at least 3-5 pre-approval lenders to see which one can offer the best deal.