Mortgage Insurance (MI) is usually automatically tacked onto the mortgage payment and made a part of it when the loan balance is over 80% of the value of the home at the time of purchase.
One sample to help illustrate this is the situation of a homeowner who purchases a $200,000 home. 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 Mortgage Insurance premium that is tacked onto the monthly mortgage payment. This mortgage insurance is intended to protect the lender since they are taking a greater risk in lending out a higher loan balance to the borrower.
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 Mortgage Insurance (MI) to be REMOVED? Under what qualifications would the bank have to remove the MI?
I know of an acquaintance who is in this situation. 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? What are the facts regarding when the insurance qualifies to be removed?
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). Why would the request for removal of the MI be based off 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. The sticky issue is that if the bank is the one ordering the appraisal, then would the appraisers be biased in favor of the bank?
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. If no action is taken sooner by the homeowner, this added insurance security for the banks are set to stay with the loan until the loan reaches 78% of the purchase price, and then the bank would be required to take it off.
If you thought all these rules regarding MI was complicated already, there’s still another factor—your loan type has an effect on the timeline for when you can get MI taken off. For example, on an FHA loan you cannot request the FHA Mortgage 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 Mortgage 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 you can request to have the Private Mortgage Insurance removed based on the loan value vs. the new appraised value.
To answer the question brought up earlier regarding the appraisal, it is the tool the bank will use to determine the current market value and it is valid only if the bank orders it through their appraiser. 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. As long as the appraised value comes in, though, you should be able to remove the MI.
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, in an effort to keep your loan on their books, the bank may just decide to go ahead and waive your MI if you are close enough to the minimum percentages needed.

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