YOU ASK:

Does FHA mortgage insurance drop at 78% ltv?

WE ANSWER:

Let us first dispense with the jargon. What 78% ltv means is that the equity you hold on the property is at 22%. This means that you have paid off around 22% of the loan of the value of the policy at the time when you closed the mortgage deal.

When this happens you are able to drop or cancel your mortgage insurance.

You see, if you don't have enough money to pay 20% down payment for the property, you need to have mortgage insurance. You will need to be covered with this insurance until your loan-to-value ratio has reached enough levels (in this case, 22% of the mortgage amount).

With this, you are now able to start the purchase of your property, even when you are just able to put down as little as 3.5% of the total value of the property. This way, mortgage companies are more or less protected and assured that you will not walk away from the mortgage when you feel you are unable to continue with the payments.

FHA usually only looks at the loan to value ratio based on either the sales price or the appraised value at the time you started the mortgage, whichever is lower. It does not allow for the appreciation (as well as depreciation) of the property value over time.

For example, if the sales price of the property is at $120,000 and the appraised value is at $100,000, FHA will cancel the insurance only when the loan amount has reached $78,000.

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