Are you throwing money away? If you have a mortgage, you may be giving away hard-earned money every single month because you didn’t send one measly document to your mortgage company.
If your down payment was less than 20% of the value of your home, you’re likely paying for mortgage insurance in addition to the cost of your mortgage. When you’ve paid back enough money to get the mortgage value to less than 80% of your home’s value, the mortgage insurance premium should disappear from your monthly bill… but it doesn’t always work that way.
Lenders don’t automatically cancel mortgage insurance when you meet the requirements to discontinue payments, so busy people could end up paying premiums for far longer than they should. You could easily throw away hundreds, if not thousands, of dollars each year on these unnecessary premiums -- and they aren't refundable.
It happened to me, and I’ll share my experience in hopes it helps you avoid a similar situation. Here’s how to check whether you’re paying for mortgage insurance when you no longer need to.
Purchasing my first home was one of the most tedious and stressful events of my life. I’d never seen or signed so many documents, and it terrified me. What was I signing up for? I don’t speak “lawyer”; what did that document even say?
I walked away from my closing appointment with house keys in my hand and trepidation in my heart. I knew I’d just purchased a home, but with all the documents flying around the table, I may have also bought a flea circus and a rental property in Costa Rica.
When I received my first mortgage statement, I was relieved to find out that I’d only purchased a home… and mortgage insurance. I didn’t know what mortgage insurance was, but judging by my monthly premium, it was expensive. How long would I have to pay and why?
I called my lender and found out that even though I’d put a substantial down payment on my home, I was required to take out mortgage insurance coverage. I would have to carry the insurance until my Loan to Value (LTV) ratio was lower (the value of the mortgage divided by the value of the home). Grudgingly, I made my payments for three long years.
At the three year mark, I met the required LTV rate. My lender continued to charge me premiums, so I contacted them to find out what the problem was. I was informed that although I met the LTV, I was required to continue to make payments for two more years.
Given that I had dutifully made my payments and reached the required LTV rate, I elevated my grievance to my congressional representative. His office investigated the matter, but found that there was no cause for further recourse.
When I reached my five year mark, I received a letter from my lender and assumed that my payments would automatically stop. I was wrong, and continued to pay for the coverage for almost a year.
These payments were unnecessary and I never recovered the money. I learned my lesson, but you shouldn’t have to learn it the hard way, too. Here’s how you can avoid overpaying your mortgage insurance premiums.
You may be wondering why you’re paying this extra charge. Mortgage insurance doesn’t protect you; it actually covers your lender in the event that you are no longer able to make your monthly payments. It’s a requirement for FHA and conventional loans that don’t have a 20% LTV ratio upon closing. Factors such as when you closed on your home, your mortgage term (usually 15 or 30 years) and your loan’s LTV ratio determine how long you have to pay mortgage insurance premiums.
FHA loans are through the Federal Housing Administration, which is part of the U.S. Department of Housing and Urban Development (HUD). The FHA insures your loan so that your lender can offer you competitive rates. Conventional loans are financed through private lenders directly and aren’t backed by government programs.
FHA loans carry mortgage insurance premiums (MIP) and conventional loans carry private mortgage insurance (PMI). They’re similar, but you’ll need to talk to your lender for details on your policy.
If you’re not sure if you purchased mortgage insurance coverage, check your closing documents or contact your lender directly. Lenders often have a department that deals strictly with insurance and taxes, and they should be able to let you know whether or not you’re paying for it, and how close you are to meeting the required LTV and other factors.
When it comes to MIP, caveats abound. The FHA determines when the required LTV ratio has been reached based on your loan term, LTV ratio and the regulations in place when the loan was closed. Also, if you’ve made a few late payments, your cancellation requests may not be honored.
If you took out your loan during certain periods, you might face additional restrictions. For instance, loans taken out after June 3, 2013 entitle the FHA to collect annual MIP for the maximum duration as permitted by Mortgagee Letter 13-04 (ML 13-04). This means that people with loans that fit inside that window must pay premiums longer than homeowners that closed prior to ML 13-04. If your loan was approved after June 3, 2013 and had a 78-90% LTV ratio, you are required to carry coverage for 11 years.
Loans with LTV ratios over 90% have restrictions that loans with lower LTV ratios don’t. Mortgages with 90% LTV ratios are required to have MIP for the life of the loan if they were taken out after June 3, 2013.
If you took out your loan prior to June 3, 2013, your mortgage’s term will determine when you stop paying premiums. For loans with terms up to 15 years, there’s no minimum time requirement for MIP. Once these loans reach 78% LTV ratio, you can cancel your MIP coverage no matter how much time has passed. If you had a 78% LTV ratio when you bought your house, you aren’t required to purchase mortgage insurance on these loans at all.
If your loan has a term of more than 15 years but you reach a 78% LTV ratio earlier, you can terminate coverage after five years. Even if you pay down your mortgage and reach a 78% LTV ratio, you must continue to pay premiums until you meet the five-year mark. This was why I wound up having to pay premiums for two more years after I’d reached the 78% requirement.
Research your insurance coverage and discuss your options with your lender to ensure that you aren’t overpaying. To learn more about FHA mortgage insurance, visit the Department of Housing and Urban Development’s website.
Although mortgage insurance is an added cost for many homeowners, it has become a tad cheaper for FHA borrowers.
On January 26, 2015, most FHA mortgages received a 0.50% reduction in MIP. If your loan was approved after that date or you’re looking at buying a house now, you’re in luck -- you’ll pay a lower premium of 0.85% instead of 1.35%, according to a press release from the White House Press Office.
Why reduce the rate? The goal is to reduce homeownership costs; The lower rate is expected to save the average mortgage holder approximately $900 in housing costs annually. It could help open the door to homeownership for 250,000 Americans. To learn more about the new rate, visit: FHA to Reduce Annual Insurance Premiums FAQ.
How to Stop Paying for Mortgage Insurance
The letter that stands between you and lower monthly housing costs is a mortgage insurance termination request. If your loan meets the requirements to no longer have coverage, you aren't required to carry it and you can request that the coverage be cancelled.
The FHA will not accept requests directly from borrowers, so send your cancellation request to your lender, who will then notify the FHA. If your lender advises you to send your request straight to the FHA, refer them to this link from the FHA website, which outlines the process. You will also need to send your lender a mortgagee letter.
You’ll also need to submit verification of mortgage payments for the last 12 months, according to the FHA, though I wasn’t asked to supply this verification.
The bad news is that if you’ve overpaid, your chances of getting a refund are almost nonexistent. Once you’ve notified your lender that you no longer want mortgage insurance, your premiums will likely be prorated to cover the cost until the day it was cancelled.
Homeownership is one of the indelible facets of the American Dream, but that doesn’t necessarily make it simple or affordable.
Overpaying for unnecessary insurance is the last thing most homeowners are interested in sinking household funds into. Make sure you can put that money to better use by checking whether you’re paying for mortgage insurance, and knowing when you’re going to be able to end those payments. You might have to work toward a far-off date circled in red on the calendar, but you’ll get there.
Your Turn: Are you paying for mortgage insurance?
Christine Edwards is always looking for ways to help readers cut expenses and increase household earnings. Her articles have appeared in Senior Life of Florida’s Boomer Guide, Epicure & Culture, Space Coast Living magazine and the Florida Today.