In this article
- Eliminate Mortgage Insurance Premiums
- Key Takeaways
- How to Get rid of Private Mortgage Insurance (PMI)
- How you Can Refinance to Remove PMI
- Reach out to your Lender and Inquire About Non-PMI Loan Programs
- How Much Will Non-PMI Refinancing Save You?
- What you Should Consider Before you Refinance out of Mortgage Insurance
- Getting Rid of Private Mortgage Insurance (PMI)
- Removing Mortgage Insurance Premiums (MIP) on FHA loans
- Is PMI Bad?
- PMI removal FAQs
Eliminate Mortgage Insurance Premiums
PMI can be a huge cost for homeowners – usually $100 to $300 every month. Fortunately, you don’t have to pay PMI forever. Once you build some equity in your home, there are several ways to eliminate PMI and reduce your monthly mortgage payments.
Some homeowners could simply request PMI cancellations, while others will have to refinance it into a loan that doesn’t need mortgage insurance. This post will look at how you can remove your PMI.
Is it possible to get rid of private mortgage insurance? Well, the answer depends on the loan type and current principal balance.
Removing the conventional PMI: Conventional PMI usually goes to zero when you’ve attained a home equity of 22%. You will essentially build equity as you pay your mortgage and your home’s value increases. You can request PMI cancellation once you’ve reached a home equity of 20%. Get in touch with your lender to request private mortgage insurance cancellation,
Requesting FHA MIP: FHA Mortgage Insurance (MIP) usually runs throughout the life of your loan until you have 10% or more down. To remove FHA mortgage insurance, you have to refinance to a conventional loan. You will need a credit score of 620 or higher and 20% home equity to eliminate the FHA mortgage insurance premium.
Since home values are rising nationwide, many homeowners still paying for mortgage insurance will now have enough equity to refinance or cancel out their mortgage insurance payments. While you might be able to do this with a new appraisal, not all lenders will allow it. It will generally be based on the terms of the original loan and the value of your home when you secured the loan.
Otherwise, you may need to refinance to get the new value considered. If you need the requirements for getting rid of PMI, you may start saving on your home loan immediately.
How to Get rid of Private Mortgage Insurance (PMI)
It’s understandable that most homeowners would rather not pay for private mortgage insurance. Fortunately, there are several ways to get rid of it for those that are eligible. Keep in mind that not all homeowners will have to refinance to get rid of their mortgage insurance.
Generally speaking, there are four main ways to get rid of PMI.
You wait for the PMI to fall off automatically: With conventional loans, the PMI will automatically drop off when the loan balance reaches or is below 78% of the appraised value of the home.
Your request for PMI cancellation: With conventional loans, you can ideally request for PMI removal at an 80% loan to value ratio, rather than having to wait for the PMI to fall off at 78%.
You refinance into a conventional loan that doesn’t have PMI: Those eligible for FHA loans can refinance into a conventional loan without PMI when their mortgage balance has reached 80% loan to value ratio.
You refinance into a non-PMI mortgage: For loans that are yet to reach 80% LTV, it could be possible to refinance them into a special loan program without PMI.
Overall, homeowners with conventional loans usually have an easier way of getting rid of the PMI. This mortgage insurance coverage automatically falls off when the loan reaches a 78% loan-to-value (LTV) ratio, which means you have attained a 22% equity in the home.
Alternatively, the homeowner can request that the PMI be removed at 80% LTV rather than wait for it to be taken off automatically when your home equity reaches 78% LTV or 22%. As you request PMI removal, the LTV ratio might be calculated based on the original purchase price of your home or based on the original home appraisal, whichever is lower.
If the value of your home has risen, you might be able to order another appraisal and get rid of the PMI based on the current value of your home. The process can vary depending on the loan servicer, so you should speak to yours to learn more about your options.
How you Can Refinance to Remove PMI
Private Mortgage Insurance can be difficult to remove for homeowners with FHA loans, just as it can be for homeowners with conventional mortgages. If your mortgage is backed by the FHA (Federal Housing Administration), your MIP (mortgage Insurance Premium) won’t automatically fall off. The MIP will generally last for the entire life of the loan, or up to 11 years for those who made a 10% or larger down payment.
Nonetheless, FHA homeowners do have options to remove their mortgage insurance. Once they have built sufficient equity on the property, refinancing to a new conventional loan would help to get rid of PMI or MIP payments.
One way you can remove MIP is through a mortgage refinance. Once you have built sufficient equity in your home, you can refinance from a conventional loan or FHA loan to a new conventional loan to get rid of the PMI and MIP payments. This is actually possible so long as the LTV falls below 80%.
Reach out to your Lender and Inquire About Non-PMI Loan Programs
You can also refinance into a different program that doesn’t require PMI or MIP payments, even with over 80% LTV. The following are some examples of mortgage loan programs that usually don’t require mortgage insurance. Note that these programs are available at the time of writing this article and may be subject to change.
Bank of America Affordable Loan Solution® mortgage
Neighborhood Assistance Corporation of America (NACA) – Best in American mortgages
The interest charged on the non-conforming loan products might slightly be higher than the conventional loans. However, eliminating the mortgage insurance payments could end up lowering your total monthly payments.
VA Loans – mortgages that are authorized by the Department of Veterans Affairs. These usually don’t require mortgage insurance and often come with competitive interest rates. In case you’re a veteran or service member, the VA loan program can be a great way to save money.
Check if you are eligible to refinance out of PMI here.
How Much Will Non-PMI Refinancing Save You?
No-PMI refinancing can yield you great savings based on the current loan balance and rates. Consider the following example:
|Refinanced mortgage (conventional)||Original mortgage (FHA)|
Let’s say that the current value of your home is $250,000 and you have an FHA loan with a balance of $195,000 and a rate of 4.25%. Let’s also assume that you have 27 years left on the loan. The monthly interest and principal you pay on this loan are just above $1,000. But the MIP you need to pay will add another $140 a month.
Now, let’s say you choose to refinance to a new conventional loan for an amount of $200,000 and get a rate of 3.75% for 30 years. Assuming that the new mortgage rolls the closing costs along with the other prepaid items into the loan. You will essentially be starting over with another 30-year loan. However, with the new principal and interest, the monthly payment will be $930 a month, without the requirement to pay MIP. This amounts to savings of over $200 a month, at least initially.
What you Should Consider Before you Refinance out of Mortgage Insurance
If you choose to refinance to remove PMI payments, you should know that it can be a smart move sometimes, but it’s not always the right decision. Many people forget that refinancing to get rid of PMI may require paying up closing costs, which may include host fees. Also, note that refinancing to a new FHA loan could add extra upfront fees that could ultimately outweigh your savings.
For FHA loans, you may need to pay your MIP upfront. If you choose to refinance an FHA loan 3 years after, you may have to pay the MIP upfront again. You want to make sure that the refinancing doesn’t cost you more than you’re saving.
You should essentially do the math of the costs and compare them to the savings to establish how long it may take for the savings you get to cover the costs of your new loan. In case it’s longer than you intend to stay in the home, then it might not be a wise decision to refinance.
There’s another caveat. If you still owe more than 80% of the value of your current home, it might not exactly be beneficial to refinance. Moreover, if your credit score is below 700, then the conventional loans through Freddie Mac and Fannie Mae will charge loan level and pricing adjustors. This could effectively know the new rate (interest) up when compared to what you pay with the current loan.
Getting Rid of Private Mortgage Insurance (PMI)
In case you are paying a conventional loan and your down payment is way less than 20%, you are likely also paying for private mortgage insurance (PMI).
Generally speaking, borrowers are required to pay PMI on conventional loans when they borrow more than 80% of the home equity. The PMI amount can be paid monthly or via a full premium payment at the time they close. The PMI will automatically drop off, either when the LTV ratio has reached 78% or when you’ve reached the midway point for your loan term.
To cancel the PMI completely, you will have to reach the 80% mark in terms of the LTV. The PMI will naturally drop off when your LTV has reached 78%. Note that in these cases, it’s typically the original value of the home being considered.
Alternatively, you can have the PMI canceled at your request when the equity of your home reaches 20% of the appraised value or the purchase price. The PMI can also be terminated when you reach the midpoint of your amortization. As such, for a 30-year loan, the midpoint of 15 years should have the PMI automatically canceled.
Removing Mortgage Insurance Premiums (MIP) on FHA loans
Mortgage insurance premiums, unlike Private Mortgage Insurance (PMI), are exclusively charged on FHA loans. The MIP payments are usually split up. You first have to pay an upfront premium when closing. The remainder of the premium will be amortized monthly over the life of your loan.
Keep in mind that when dealing with FHA loans that have LTV ratios between 70% and 90%, the MIP will have to be paid for 11 years. However, with LTV above 90%, the MIP has to be paid for the entire term of the loan. As such, if you have an LTV amounting to something like 91% and have a term of 30 years on your FHA loan, then you will have to pay MIP for 360 payments.
This remains true unless you choose to pay off your mortgage early or refinance your loan. If you’re working with an FHA loan, and you’ve built more than 30% equity in your home before the required 11-year MIP period is done, then a refinance could help you with ditching the insurance costs early.
Is PMI Bad?
PMI tends to annoy lots of homeowners, and it’s quite easy to see why: you are effectively paying for coverage that’s meant to protect your lender. The same applies to the MIP requirement on FHA loans.
However, mortgage insurance coverage is not necessarily a bad thing. Don’t forget that without it, you would be paying much higher interest rates as your lender would be taking a bigger risk for the loan. This is especially the case for the homeowners who make a minimum of 3% down payment of the conventional loan or only put down 3.5% on their FHA loan.
Nonetheless, you can stop making this extra payment without having to erase your savings in higher interest rates or closing costs.
PMI removal FAQs
How Can I Remove PMI Payments without Making a 20% Down Payment?
In case you’re still shopping for a loan, you can avoid paying PMI by choosing a non-PMI, special loan, or apply for an 80/10/10 piggyback loan that essentially stimulates a 20% down payment. In case you already have a mortgage with PMI, you might just be able to refinance it into a no-PMI loan.
Can I Remove PMI with a New Appraisal?
If you choose to refinance to remove Private Mortgage Insurance (PMI), the refinancing process will likely include a new value of your property to ascertain that your loan is actually below the 80% LTV mark.
For those homeowners with a conventional mortgage loan, you might be able to remove PMI with a new appraisal if the value of your home has risen enough to put you at over 20% equity. Nonetheless, some loan services will re-assess your PMI depending on the original appraisal. As such, you should consider contacting your servicer directly to learn more about the options available to you based on your current situation.
Can I Remove Mortgage Insurance on an FHA Loan?
All FHA loans usually include mortgage Insurance Premium (MIP), which is a form of insurance that is exclusively applied to FHA loans. However, if you have enough home equity (which should be 20% and above), it’s possible to refinance the FHA loan without private mortgage insurance.
Is Mortgage Insurance Wasting My Money?
The MIP on FHA loans and Private Mortgage Insurance (PMI) are usually worth your money if they let you buy your house sooner. Nearly all mortgage programs that have less than 20% down will require mortgage insurance. This means that mortgage insurance is quite popular with homebuyers who want to avoid waiting years to save up for a huge down payment.
Keep in mind that mortgage insurance isn’t permanent. You can remove it or refinance to get out of it later on.
Will I Ever Get my PMI Money Back?
The money paid as PMI premiums is usually non-refundable. You can think of it as your car insurance – you pay the premiums, and the insurer only pays you out if something bad happens to your car. The one exception to this rule is that FHA streamlines refinance. When you refinance your existing FHA loan into another FHA loan within 3 years, you can receive a partial refund for the initial MIP payment for the original loan.
You can easily qualify for this loan if you have a pretty good payment history for the previous three consecutive months.
Does it Help to Refinance to Remove Private Mortgage Insurance?
It’s only worth it to refinance to get rid of Private Mortgage Insurance if your savings can outweigh the closing costs of your refinancing. The current market of low-interest rates gives you a great opportunity to get out of a loan with high-interest rates while at the same time eliminating the mortgage insurance payments.
However, you will still have to consider how long you intend to stay in the current house after refinancing your loan. If you’re only looking to stay there for a few years, then you might end up spending more to refinance than you save. However, if you see yourself in the house for another 5 or more years, getting a refinance to remove PMI will likely be worth it.
It might also be worthwhile if you have access to no-closing cost refinance or if you can roll the closing costs into the loan balance.
How Much will the PMI Cost?
PMI usually costs 0.5% to 1.5% on average for the loan amount annually. This translates into $1,000 to $3,000 every year as PMI for a $200k loan. Or $83 to $250 a month. The PMI rates will largely depend on your credit score and the amount of down payment you made.
Will a Second Mortgage also Require PMI?
Taking up a home equity line of credit or a home equity loan won’t necessarily require extra PMI payments. PMI will only apply to your home’s original lien. A second mortgage can help you avoid paying PMI as it covers a huge portion of your down payment on the home purchase through the 80-10-10 piggyback mortgage option.
Will the PMI be Based on the Home’s Current Value or its Original Sales Price?
Different loan servicers and lenders will use different strategies to determine your loan-to-value ratio. Some lenders will calculate the LTV based on the original purchase price of your home, while others will rely on the initial home appraisal figure. You could pay for a new appraisal in case the current value of your home has risen significantly since you first purchased it.
The appraisal could cost up to $500, but the fee might be worth it if the current value of your home shows that you have attained 20% equity in the home. This will be enough equity to cancel out the PMI on a conventional mortgage, which can save you money every month.
Will VA or USDA Loans Require PMI?
USDA loans will require their brands of insurance for mortgages. They tend to be less expensive compared to the MIP requirements by the FHA. VA loans don’t require ongoing mortgage insurance. However, VA borrowers will have to pay an upfront VA funding fee. Plus, VA loans can only be used by current veterans or active duty military members.
Can a Lender Cancel PMI Automatically?
According to the Homeowners Protection Act of 1998, lenders should disclose their mortgage requirements to homebuyers. Loan servicers are also required to cancel the PMI payments automatically when the LTV falls to 78%. Still, you can request PMI cancellation once the LTV falls to 80%.
How is LTV Calculated?
It’s done by dividing the current mortgage balance by your property value and multiplying it by 100.
What if the Lender Won’t Cancel PMI When I Reach 80% LTV?
The first thing you want to do is check your numbers. Your lender might be using your initial home purchase price to calculate your LTV. You might need a new appraisal to demonstrate how your home’s current value has risen. If you think your lender is in violation of the Homeowner’s Protection Act, you should report this to the Consumer Financial Protection Bureau.
Check your Eligibility for Refinancing
When you refinance to remove PMI, you could reduce your mortgage costs by a huge margin and save some cash for months or years to come. Aside from dropping your mortgage insurance, you might lower your rate and even save on interest over the loan’s lifespan.