How To Save Money by Cancelling Mortgage Insurance
It’s always tricky to figure out which insurance you need and which you can skip. Health insurance, car insurance, pet insurance … most of these are no-brainers. Although, even those sometimes give you pause for thought. But then you get into even more nuanced insurance. Most of the time you worry that canceling your insurance will harm you. However, in some cases, it’s the best thing that you can do for yourself. For example, many people suggest that cancelling mortgage insurance can save you a lot of money. We’re talking thousands of dollars. Should you do it? And if so, how?
What Is Mortgage Insurance?
Before we discuss the pros and cons of cancelling mortgage insurance, let’s make sure we know what we’re talking about. What exactly is mortgage insurance? It’s insurance that you may have been required to purchase when you got your mortgage. Basically, you pay annually for this insurance as a protection for your lender. If you default on your mortgage, they at least have that money from you up front.
Mortgage insurance (usually called PMI for private mortgage insurance) is a very common part of the home buying process. To be honest, you might not even have noticed that you were paying it. It’s rolled in there with all of your other costs. Anyone who buys a home with a conventional mortgage with a down payment of less than 20% usually pays an annual mortgage insurance fee.
How Much Is Your Mortgage Insurance?
Your mortgage insurance depends on a number of different factors. Moreover, it changes as you pay down your house. So each year, they recalculate it again and the number should go down. Bankrate explains that you typically pay somewhere between 0.3% and 1.5% of your mortgage annually as your mortgage insurance fee. Cancelling mortgage insurance means putting that money back in your pocket.
Exactly how much money is that? Bankrate reports that it amounts to about $20 – $70 per $100,000 of mortgage loan. So, let’s say that you borrowed $500,000 for your house. You might pay $350 per year in mortgage insurance at the start of the loan. As you pay off the loan, the annual amount decreases. Nevertheless, you’re easily losing hundreds, if not thousands, of dollars by not canceling mortgage insurance.
Is Cancelling Mortgage Insurance Allowed?
Lenders include this as part of the loan process for a reason. They want to protect themselves in case you default on the loan. Therefore, you have to wonder, is cancelling mortgage insurance allowed? It is. In fact, eventually the mortgage will cancel on its own. However, there are caveats early on. And there are also things that you can do to cancel it earlier. That’s what you need to learn about.
Automatic Cancellation of Mortgage Insurance
As aforementioned, the lender automatically cancels your insurance eventually. When? When one of the following two things happens:
- Your mortgage balance goes to or below 78% of the original purchase.
- You’ve reached halfway through your amortization schedule.
So, let’s say that you borrowed $500,000 on a 30-year loan. 78% of that is $390,000. Therefore, when you only own $390,000, your mortgage insurance should automatically cancel. Likewise, even if you still owe more than that, if you reach the halfway mark (which in this case is 15 years), then again the lender should cancel your insurance. Read the fine print, though; you can’t have missed any mortgage payments during that time.
If you believe that you currently meet either of these criteria, then make sure that you aren’t continuing to pay mortgage insurance.
Other Ways to Cancel Mortgage Insurance
If you want to save money, though, then you might try to find ways of cancelling mortgage insurance early. Here are your options:
- Request cancellation at 80% payment. In the above example, when you’ve reached $400,000 owed, contact the lender and request that they cancel your mortgage insurance. Although it happens automatically at 78%, you’re allowed to cancel it yourself at 80%. This can save you hundreds of dollars depending on your loan.
- Pay down your mortgage faster. If you’re able to increase your payments on your mortgage, then do so. The faster that you can get down to that 80% owed mark, the sooner you can cancel your insurance. After all, wouldn’t you rather pay that money towards your home loan than have it go to insurance you’re not even using?
- Reappraise / refinance your home. If your home has increased a lot in value in recent years, then you might be in luck. You might have already paid 80% of what your home is currently worth, even though it’s not 80% of the original purchase price. Think of it this way: you borrowed $500,000 for a home that’s now worth $800,000. 80% of $800,000 is $640,000. You don’t owe that much. Therefore, you can cancel your mortgage insurance. Similarly, you might refinance for better rates on a home mortgage that’s valued at higher than originally priced. Get a new loan that’s less than 80% of the new value of the home. Note that all of these things come with caveats – there are closing costs to refinance and appraisal costs if you go that route. Therefore, you have to weight the costs and savings. But there are all legitimate ways of cancelling mortgage insurance.
Why To Act Now to Cancel Mortgage Insurance
Mortgage insurance isn’t there to protect you. It’s not like renter’s or homeowner’s insurance where you get something out of the deal. Instead, it’s there to protect your lender. You’re giving them money until you’ve paid down a certain amount on the loan. It’s a guarantee that their investment in you won’t leave them with nothing. Therefore, the sooner you can get out from under those payments, the better. If you can afford to pay down your house to that 80% mark, then you should do it. It puts that money into your house instead of into your lender’s pocket. It’s the smart thing to do.
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