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When a borrower's loan-to-value ratio is high, lenders often charge private mortgage insurance in addition to interest and principal. Mortgages insured by the Federal Housing Administration may also carry mortgage insurance. As the borrower's loan-to-value ratio increases, however, he may be able to eliminate mortgage insurance from his loan and lower his monthly payment.
About Private Mortgage Insurance
Private mortgage insurance is third-party insurance coverage that protects your lender from loss. If you fail to repay your loan, the mortgage insurance policy will reimburse the lender for a certain percentage of the delinquency. Lenders typically require private mortgage insurance when your loan-to-value ratio is more than 80 percent. Annual private mortgage insurance premiums are typically 1/2 percent to 1 percent of the loan balance.
Canceling Mortgage Insurance
Under the Homeowners Protection Act of 1998, lenders must automatically cancel your mortgage insurance when your loan-to-value ratio reaches 78 percent, as long as your mortgage payments are current. This act also allows you to request a cancellation of mortgage insurance when your loan-to-value ratio reaches 80 percent. However, the lender does not have to cancel the policy if you have other liens against your property, have missed or made late payments during the last year or are a high-risk borrower.
FHA Mortgage Insurance
If you have a 30-year mortgage insured by FHA, you must pay mortgage insurance until your loan-to-value ratio is 78 percent or less and you have made at least five years' worth of mortgage insurance payments. If you have a 15-year loan insured by FHA, you must pay mortgage insurance until your loan-to-value ratio reaches 78 percent. As soon as you meet the qualifications for cancellation, FHA will automatically discontinue your mortgage insurance policy.
Under the Homeowners Protection Act of 1998, lenders must disclose your rights with regard to mortgage insurance cancellation at closing and at least once each year. The Homeowners Protection Act of 1998 applies only to mortgages closed on or after July 29, 1999. If you have an FHA loan and you want to eliminate mortgage insurance before you meet FHA requirements for cancellation, you may be able to do so with a conventional refinance.