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Find Out How Mortgage Insurance Can Be An Expense That You Can Eliminate
By Dave Clocker
One expense that can be pretty significant is the Insurance (MI) that is added to home mortgages 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 Insurance premium that is tacked onto the monthly payment. This insurance is intended to protect the lender because when the bank lends to someone who doesn’t put invest much downpayment, the bank must protect itself from loss with the insurance.
We’ll fast forward in time. 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 Insurance (MI) to be REMOVED? When can the homeowner request that the MI be eliminated from the monthly mortgage?
Many people, like a friend of mine, are experiencing this situation and do not know the facts.. 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 this true or is the rep playing around?
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). It didn’t make sense to me that the insurance waiver would be contingent on 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. How can someone be sure that the value the appraiser brings in is accurate if the bank is the one selecting it?
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? In the interest of saving money, it would be better to pay for the appraisal knowing that it will bring in the needed value to accomplish the objective of getting the MI removed.
No doubt as you are reading this that these thoughts have crossed your mind about your MI. 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. As a general rule the bank won't voluntarily remove insurance until the loan balance drops below 78% of the purchase price.
The time when you can request to remove MI is dependent on the type of loan you have. For example, on an FHA loan you cannot request the FHA 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 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 the MI is more temporary and can be eliminated at an earlier time if the new appraised value qualifies.
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 provide some preliminary range for you to work with. 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. If the market value is holding well, then there shouldn’t be any issues with getting the appraised value in and the MI waived.
Overall, the loans can contain varying content and terms, so you have to carefully read the loan paperwork, it spells it out in every case.
If you find all this MI to be a hassle and your current loan terms and rates are not very favorable, then 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, it just may happen that the bank will give you a break and eliminate the MI so you won’t move your loan elsewhere.

Experience real estate like you've never known before. Dave Clocker is a real estate investor who will teach you the Secrets That 99% Of The Individuals Out There Will Never Know About How To Almost Magically Generate Wealth Thru Real Estate. He has taken these creative strategies and combined them into content-packed videos, insider reports, and interviews with experts. Check more out at www.RealEstateWayToWealth.com