Piggybacking A Second Loan
You may be able to only put 5% or 10% down on a home purchase and take out a second loan to avoid PMI. The lender is generally only concerned about the LTV on the first mortgage loan, says Thomas Bayles, senior vice president at the Los Angeles-based Mortgage Capital Partners. Bayles has worked with homebuyers who avoided PMI with a 10% down payment by financing the other 10% with a home equity line of credit.
If this is a strategy youre considering, youll need to do your homework and make sure the math works out. Second mortgages have higher rates than traditional home loans, and a HELOCs rate is usually adjustable, meaning it can increase after an introductory period. A HELOC will typically have a shorter repayment schedule than a traditional mortgage, and may have a large balloon payment at the end or prepayment fees. So you always need to understand how a HELOC will affect your monthly payments down the road.
If you think piggybacking loans to get rid of PMI is good for you, make sure you understand all the ins and outs of a second loan. Otherwise, stick with one of the more traditional methods of avoiding PMI.
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Four Ways To Get Rid Of Pmi
Understandably, most homeowners would rather not pay for private mortgage insurance .
Luckily, there are multiple ways to get rid of PMI if youre eligible. Not all homeowners have to refinance to get rid of mortgage insurance.
Homeowners with conventional loans have the easiest way to get rid of PMI. This mortgage insurance coverage will automatically fall off once the loan reaches 78% loan-to-value ratio .
Or, the homeowner can request that PMI be removed at 80% LTV instead of waiting for it to be taken off automatically when home equity reaches 22% .
When requesting PMI removal, the loan-to-value ratio may be calculated based on your homes original purchase price or based on your original home appraisal . Or, if your homes value has risen, you may be able to order another appraisal and remove PMI based on your homes current value.
Fha Personal Mortgage Insurance Removal
If youre a homeowner with a mortgage backed by the Federal Housing Administration , youve probably been paying a monthly fee known as mortgage insurance premium . You may have heard that MIP is a required element of all FHA loans, but you may be able to get rid of it under certain circumstances.
Much like private mortgage insurance on a conventional mortgage, MIP is designed to protect the lender against losses in case the homebuyer defaults on the loan. MIP premiums are calculated based on the total amount of the loan, the loan term, and the loan-to-value ratio ratio. It can run you anywhere from 0.45% to 1.05% of the loan amount every year so it makes sense that many homeowners want to learn how they can get it removed.
While PMI can be cancelled as soon as the homeowner has built up enough equity, MIP has its own complex set of rules. Generally, there are three ways of removing or reducing MIP: automatic cancellation, conventional refinancing, and FHA refinancing.
Are you eligible for one of these options? Read on to learn more.
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Canceling Mortgage Insurance Automatic
The termination date is the date on which, according to the amortization schedule, the principal balance reaches 78% of original value. The lender must automatically cancel the mortgage insurance on the termination date.
In this case, the lender doesnt determine the actual principal balance based on actual payments. The principal balance comes from the amortization schedule. A borrower cannot advance the termination date by making additional payments to lower the principal balance of the mortgage.
It also doesnt matter if the current value of the property has declined below the original value. Lenders are not allowed to make a borrower to pay for a property valuation, before they cancel mortgage insurance.
The borrower must be current in making payments. If the borrower is not current on the loan on the termination date, mortgage insurance still needs to stop on the first day of the first month after the date that the borrower becomes current on the loan.
For Fha Loans Opened Before June 3 2013
If you closed your FHA loan prior to June 3, 2013, you can cancel your loans annual MIP payments if:
If you havent quite reached the 78% loan-to-value ratio , keep making regular payments and checking with your loan servicer.
Borrowers who have already hit the magical 78% LTV can potentially start saving hundreds on their monthly payments and keep their existing FHA loan and interest rate intact.
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What Is A Broker Price Opinion
Broker price opinion definition
A broker price opinion, commonly known as a BPO, is a real estate professionals opinion of a propertys value. BPOs are most often used when setting the list price of a property, similar to a comparative market analysis, and in the case of a foreclosure or short sale.
To determine the BPO, a real estate agent or broker will use his or her expertise to assign a dollar amount to a property based on certain factors. BPOs are normally performed by a broker who is familiar with the local housing market.
Usually, the agent does this as part of their listing agreement when selling a house, explains Rocke Andrews, president of the National Association of Mortgage Brokers and owner of Lending Arizona. They look at similar properties that have sold recently and provide an estimate of what the home should be listed for.
There are two main types of BPOs: internal and external. An internal BPO involves a broker spending time inside the property to evaluate the condition of the home, take measurements and capture photographs. With an external BPO, sometimes referred to as a drive-by BPO, a broker may simply be able to assess the outside of the property before giving it a sticker price.
A BPO is helpful in the early stages of the real estate transaction when setting the list price of a home. The home seller gets an understanding of what the property will command, and the buyer gets an understanding of what they will need to pay to own it.
How Are Mortgage Insurance Escrows Applied To The Payment
Lenders collect monies on escrow and remits to PMI when the premium is due. Typically lenders collect 14 months of premiums at a home loan closing. Twelve months of the premium is paid to PMI as the initial premium. The remaining two months are used to start the escrow account. The borrower then pays a percentage going forward that is applied to the escrow account.
Contact your loan servicer with additional questions regarding escrow PMI and whether or not mortgage insurance comes out of your escrow account. It’s also a good idea to familiarize yourself with a mortgage escrow account in general.
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If Your Mortgage Is From A Federally Chartered Lender
Under federal law, lenders are not required to take market appreciation into account when determining the value of your home. Federal law requires lenders to cancel PMI, upon request, when the homeowner has made payments that reduce the principal amount owed under the mortgage to 80 percent of the homes value at the time it was purchased. For example, if a homes purchase price was $100,000, the lender is not required to cancel the PMI until the principal amount due on the mortgage is reduced to $80,000. Because the first years of a mortgage payment are mostly interest, a homeowner making only the minimum required payments would have to wait years, sometimes a decade or more, before reaching the required 20 percent threshold as calculated under federal law.
Once a homeowner pays the mortgage principal down enough to qualify for PMI cancellation, federally chartered lenders may require an appraisal to ensure that the homes value has not declined below its original value when purchased. Although federal law does not require lenders to take market appreciation into account, some lenders may agree to do so. For example, some lenders may agree to cancel PMI based on the homes current value if you have made substantial improvements to it others may elect to cancel PMI if an appraisal shows that the value of your home has markedly appreciated. You must contact the lender directly to begin the appraisal process.
Option : Reappraise Your Home If It Has Gained Value
In a hot real estate market, your home equity could reach 20 percent ahead of the loan payment schedule. In this case, it might be worth paying for a new appraisal. If youve owned the home for at least five years, and your loan balance is no more than 80 percent of the new valuation, you can ask for PMI to be cancelled. If youve owned the home for at least two years, your remaining mortgage balance must be no greater than 75 percent.
Appraisals for a single-family home typically cost between $250 and $500, depending on your area. Some lenders might be willing to accept a broker price opinion instead, which can be a substantially cheaper option than a professional appraisal. On the flip side, professional appraisals are highly regulated and provide an unbiased assessment.
Who this affects: Borrowers who live in areas that are particularly red-hot might have seen their home values shoot up in the last couple years. In fact, the value might have increased enough to bump you out of the PMI range. If this is the case, its time to talk with your lender about getting a new appraisal and potentially cancelling your PMI requirement.
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What If My Lender Wont Cancel Mortgage Insurance
If you think you shouldnt be paying for mortgage insurance, write to your lender. Under Section 6 of the Real Estate Settlement Procedures Act , lenders must acknowledge the complaint within 20 business days. They must resolve the complaint within 60 business days by correcting the account, or by stating the reasons for its position.
What You Should Consider Before You Refinance Out Of Mortgage Insurance
If you choose to refinance to remove PMI payments, you should know that it can be a smart move sometimes, but its not always the right decision. Many people forget that refinancing to get rid of PMI may require paying up closing costs, which may include host fees. Also, note that refinancing to a new FHA loan could add extra upfront fees that could ultimately outweigh your savings.
For FHA loans, you may need to pay your MIP upfront. If you choose to refinance an FHA loan 3 years after, you may have to pay the MIP upfront again. You want to make sure that the refinancing doesnt cost you more than youre saving.
You should essentially do the math of the costs and compare them to the savings to establish how long it may take for the savings you get to cover the costs of your new loan. In case its longer than you intend to stay in the home, then it might not be a wise decision to refinance.
Theres another caveat. If you still owe more than 80% of the value of your current home, it might not exactly be beneficial to refinance. Moreover, if your credit score is below 700, then the conventional loans through Freddie Mac and Fannie Mae will charge loan level and pricing adjustors. This could effectively know the new rate up when compared to what you pay with the current loan.
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When Does Bpmi Go Away
You must pay BPMI until you have 20% equity in your property. Equity refers to the percentage of your principal or mortgage balance that youve paid off. For example, lets say you borrow $100,000 to buy a home and you pay off $30,000 of principal. This means you have 30% equity in your home.
Keep in mind that payments that only go toward your principal balance count toward your equity. Paying interest doesnt help you build equity. Contact your lender and request a mortgage statement if you dont know how much equity you have. Many lenders also make this information available to you online.
You can contact your lender and request that they cancel your BPMI once youve built 20% equity in your home. Many lenders will automatically do this once you reach 22% equity.
Is Fha Mortgage Insurance Tax
The mortgage insurance deduction was brought back at the end of 2019. Because of this, you might be able to itemize FHA upfront MIP for tax year 2021, and also retroactively for tax years 2018, 2019 and 2020. Its best to speak with a tax professional, however, to ensure youre maximizing this deduction if youre eligible.
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How To Cancel Your Private Mortgage Insurance
There are several different ways to get rid of PMI. One scenario involves contacting your lender when your mortgage loan-to-value ratio falls to 80%. At that point, youll have 20% equity in your home.
To cancel your PMI, youll need to submit a written request. Your lender will then need to ensure that youve consistently paid your bills on time and that youre current on your mortgage payments. Youll also need to have your home appraised before you can officially shed your PMI. If your home value has fallen, canceling your PMI may not be possible.
According to the Consumer Financial Protection Bureau, your lender must also confirm that there are no other liens on your home before canceling your PMI. If you have a second mortgage such as a home equity line of credit you may have to work on paying down that loan .
How To Get Rid Of Mortgage Insurance
Mortgage insurances are measures put in place to protect lenders from buyers who default on their home loans. The insurance repays the lender in the event of a no-show from the borrower. A Private Mortgage Insurance is the more popular type of mortgage insurance, and it is sold by private companies. The other type of mortgage insurance is the FHA mortgage insurance. This type is sold by the Federal Housing Administration. Mortgage insurances are quite expensive, especially the PMIs. That fact, combined with the fact that the borrowers have to pay the insurance premiums alone, is the reason most buyers cannot wait to get rid of their mortgage insurances. However, you should note that while you can get rid of your PMI, you can’t get rid of recent FHA insurance.
To get rid of your PMI, you would need to have built at least 20% equity in the home. This means that you have to bring down the balance of your mortgage to 80% of its initial value . At this stage, you may request that your lender cancel your PMI. When your mortgage balance drops to 78% of the initial purchase price of the house, the lender has to eliminate your PMI.
According to the Consumer Financial Protection Bureau, these are the requirements to be met before you can get rid of your PMI:
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When I Can Get Rid Of Mortgage Insurance
If your loan balance has reached the 80/20 LTV mark, contact your mortgage servicer and ask them to remove the mortgage insurance. Under the Homeowners Protection Act, mortgage lenders are required to get rid of PMI when the balance on your loan drops to 78%.
You may be able to speed up this process by sending a PMI cancellation letter to your lender. In addition to possibly setting up an appraisal, they’ll have to verify your home value as well.
The Cost Of Fha Mortgage Insurance Premium
The initial cost of FHA MIP is 1.75% of the total mortgage amount. The up-front premium is rolled into the home loan for most borrowers, adding to the total cost of borrowing from the start. The ongoing cost of MIP, however, can be far more expensive over the long term. The annual MIP for FHA mortgages, which is broken up on a monthly basis, is calculated as follows:
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How To Remove The Mortgage Insurance Premium From A Fha Loan
Related Articles
FHA loans offer a great opportunity to get into a house with as little as 3.5 percent down and less-than-spectacular credit. However, itâs likely youâll find yourself paying a monthly mortgage insurance premium. Not everyone qualifies to remove the mortgage insurance premium from their loan. When your loan originated and how much you put down are two factors that affect whether your mortgage insurance premium is removable.
Tip
As of 2018, FHA government backed mortgages no longer allow PMI to be removed if the down payment was less than ten percent. It stays for the life of the loan. The remedy is to refinance into a conventional loan when the equity reaches 78 percent.
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