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Looking For A Place To Save Some Money? Then Track Your Mortgage Insurance

Mortgage Insurance (MI) is usually automatically tacked onto the mortgage payment 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 since they are taking a greater risk in lending out a higher loan balance to the borrower.

So what does the future hold?. Let’s imagine it is a couple of years later and the house has experienced good appreciation and now has some equity. The home’s 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? Is the bank obligated to remove it as long as the LTV meets this guideline?

I know of an acquaintance who is in this situation. 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? Is the customer service person relaying the correct information?

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.

Furthermore, to arrive at the current market value, an appraisal will have to be performed on this property. 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. A point of concern is whether the selected appraiser will be fair when completing the appraisal, especially in cases where the value is very close.

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? I don't see the reason in having one done unless the homeowner knows that the value is there.

These may be questions you have considered about your mortgage insurance as well. 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 you can request to have the Private Mortgage Insurance removed based on the loan value vs. the new appraised value.

As a part of determining the new appraised value, the bank will be the party to place in the request with their appraiser to evaluate the value of the home. 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 bank’s appraiser will come in with the value you need. The bank’s 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, keep in mind that each loan may differ, 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 you’ve been very good at making your monthly payments on your existing loan, in an effort to keep your loan on their books, the bank may just decide to go ahead and waive your MI if you are close enough to the minimum percentages needed.

Article Source: http://www.noviceinvesting.com/Article

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