When you take out a mortgage, especially with a down payment less than 20%, you'll typically be required to pay for mortgage insurance. This insurance protects the lender in case of default. However, as you pay down your mortgage and your loan balance decreases, you might wonder what happens to this insurance once it drops below 80% of your home's value.

Once your loan-to-value (LTV) ratio falls below 80%, there are important changes in your mortgage insurance obligations. Here's what you need to know:

Automatic Cancellation of Mortgage Insurance

If you have a conventional loan, mortgage insurance is generally canceled automatically when your LTV ratio reaches 78%. This typically happens as you make regular monthly payments. However, to ensure the automatic cancellation takes effect, you must be current on your payments. It's crucial to keep track of your loan balance and the value of your home to confirm when you've reached this threshold.

Requesting Cancellation

If you find that your LTV ratio has dropped below 80%, you can also request the cancellation of your mortgage insurance. This request can be made once you have reached 80% equity in the home. To do this:

• Contact your lender and express your intention to cancel the mortgage insurance.
• Provide any documentation they require to support your request, such as a recent appraisal or proof of payment history.

Bear in mind that your lender may require you to have made a specific number of on-time payments before they will consider your request. It's a good idea to understand your lender's specific policies regarding cancellation.

Differences in Loan Types

Different mortgage types may have variations in their rules regarding mortgage insurance cancellation. For example, FHA loans have different guidelines, and mortgage insurance premiums might remain for the life of the loan if the loan originated after June 3, 2013, unless you refinance. Always review your loan agreement or consult your lender for specifics.

Impact on Home Equity

Remember, if you wish to pay off your mortgage insurance early, you can do so through refinancing, especially if your home has appreciated significantly in value since your purchase. This can also lower your monthly payments and help you build equity faster.

Conclusion

Understanding how mortgage insurance works, especially as your loan balance decreases, can help you save money in the long term. Keep track of your mortgage balance and home value, and don’t hesitate to reach out to your lender about cancelling your insurance once you reach the necessary equity threshold.