Mortgage insurance is designed to protect the financial interests of lenders and mortgage investors in the event that you default on your loan. Typically, you pay for the insurance with an upfront premium and monthly charges that form part of your mortgage payment. In some instances, you can not only cancel the insurance but you may also get a refund.
Your lender has the right to foreclose on your loan and sell your home if you default on your mortgage. In theory, the foreclosure sale should raise enough cash to settle the debt. However, falling home prices, back taxes, legal fees and maintenance costs may result in your lender taking a loss. To prevent this from happening, lenders typically require you to buy mortgage insurance if you have less than 20 percent equity in your home. If your lender loses money during the foreclosure sale, the mortgage insurer coves some of the lender's losses.
In 1998, President Bill Clinton signed the The Homeowners Protection Act into law. Among other things, the Act requires mortgage lenders to automatically cancel your private mortgage insurance policy once you have built up 22 percent equity in your home. In 2000, the Federal Housing Administration adopted similar rules for FHA insured loans when it initiated the Homebuyer Savings Plan. On FHA loans, lenders must cancel your mortgage insurance when you have 22 percent equity in your home. You may get a refund on your upfront FHA mortgage insurance payment if you did not default on your loan. Likewise, you may get a refund on a portion of private mortgage insurance policy once the coverage ends.
Prior to the automatic cancellation, you can submit a written request to your lender to have mortgage insurance cancelled once you have built up 20 percent equity in your house. Lenders determine equity by dividing the current mortgage balance into the purchase price or appraised value of your home at the time you established your loan. Many lenders provide borrowers with amortization schedules that track your loan balance reduction over the course of your loan. Your lender must respond to your request within 60 days, and may require mortgage insurance to stay in place if you have a second lien on the home or if you have had recent late payments. Any refunds are issued once the insurance policy has been cancelled.
Federally sponsored mortgage entities Freddie Mac and Fannie Mae regard certain loans such as large dollar or jumbo loans as high-risk mortgages. On a high-risk loan, mortgage insurance remains in place until you have built up 23 percent equity in the property. On a rental home your lender may require you to keep mortgage insurance in place until your loan balance amounts to just 65 or 70 percent of the property value. If your lender wrongfully refuses to cancel a policy or issue a refund, you must contact the state insurance department. Federal agencies including the Comptroller of the Currency, Federal Deposit Insurance Corporation and Federal Reserve also investigate issues of lender non-compliance.