Reducing Your Monthly Mortgage Payment, the Right Way –
Every borrower has concerns when choosing a mortgage, especially if they are purchasing a home for the first time. Can they afford their monthly payment? Will their mortgage payments increase? Do they qualify for the best interest rate? All of these are good questions. An often overlooked question to consider is: can I safely reduce my fixed monthly mortgage payments over time? Only private mortgage insurance (MI) provides a built-in mechanism that allows a borrower to cancel coverage, resulting in substantial savings on a monthly mortgage payment.
Private mortgage insurance has helped millions of creditworthy borrowers who could not afford a 20 percent down payment to qualify for mortgage financing and purchase a home sooner than they could otherwise. It plays an important role in the mortgage industry by protecting the lender against loss if a borrower defaults, but some private mortgage insurers also offer protection for borrowers facing financial difficulty, through job loss protection and homeowner assistance programs.
Many borrowers are unaware that private mortgage insurance is cancellable, unlike the mortgage insurance offered on most loans insured by the Federal Housing Administration (FHA). Borrowers are able to request cancellation of their private mortgage insurance when their timely mortgage payments (no payments missed in the past 12 months) reach the level of 20 percent equity in the home, resulting in a decrease in monthly payments going forward. Otherwise, the mortgage insurance will automatically cancel when the mortgage reaches 78% if its original value, again assuming the borrower is current on all monthly payments.
In fact, nine out of ten borrowers are able to cancel their mortgage insurance within five years of purchasing their home, according to the Mortgage Insurance Companies of America (MICA). By contrast, FHA-insured home loans do not generally offer the same feature because a large portion of FHA insurance is often financed into the life of the loan, leaving a smaller monthly premium that can be cancelled.
Borrowers can achieve 20 percent equity sooner by making regular payments, making smart improvements that increase the value of their home, and by making additional payments to loan principal when possible. By contacting their servicer, borrowers can determine their principal balance and whether they qualify for cancellation. Additionally, a servicer can arrange for an appraisal of the property to determine the value of a home. However, this appraisal is at a cost to the borrower.
Compared to FHA, borrowers do not have to pay for private MI longer than needed, and cancelling insurance upon proof of sufficient equity is often at no additional cost to them. All this takes is a few easy steps and a conversation with the loan servicer, who can verify the borrower’s requirements for cancelling MI. For more information on how borrowers can cancel their MI, visit https://www.privatemi.com/loanoptions/benefits/cancelable.cfm. There you will find an easy kit for borrowers to calculate how long it will take them to reach 20 percent equity, and learn the steps needed to cancel their mortgage insurance.
