How to get rid of mortgage insurance

Published March 13, 2018
Charlie Edler (NMLS ID: 1667158)
by Charlie Edler (NMLS ID: 1667158)

 Jar of Money on a Wooden Table with Text That Reads: Small Change. Big Savings

If you’re a homeowner, you might be familiar with (or currently paying) mortgage insurance. To offer affordable options, lenders often require mortgage insurance for certain types of loans. This insurance lowers lenders’ financial risk and makes homeownership accessible even if you don’t have a ton of cash to pay up front. While these loans can make it easier or faster to get your dream home, paying mortgage insurance every month can add up over time. The good news? We’ve outlined several easy paths to removing your mortgage insurance below.

Understanding LTV

Your path to removing mortgage insurance depends on the type of loan you have and its mortgage insurance LTV requirements. Your LTV, or loan-to-value ratio, basically measures how much equity you have in your home. You can calculate your LTV by dividing your current loan balance by the original value of your property and multiplying that by 100. So if you put 10% down on a 200,000 home, your initial loan balance would be $180,000 and your LTV would be 90%. The more payments you make, the lower your LTV will be.

Types of mortgage insurance

Conventional loans: PMI
Mortgage insurance for conventional loans is called private mortgage insurance or PMI (conventional loans are loans that are not part of government programs like FHA).

  • PMI is required if your LTV is above 80% (meaning your down payment was less than 20%).
  • PMI cancels automatically when you pay off enough of your loan that your LTV reaches 78%, or if you’ve reached the midpoint of your loan term (i.e. 15 years into a 30-year fixed loan).
  • PMI can also be canceled slightly earlier, at 80% LTV, upon your request, given that you’ve met your lender’s criteria.

FHA Loans: MIP
On the other hand, mortgage insurance for FHA loans, called mortgage insurance premium or MIP, is required for all borrowers – regardless of their LTV.

  • If your LTV was greater than 90% when you bought your home (meaning you put less than 10% down), you’ll have to pay MIP for the entire life of the loan
  • If your LTV was 90% or less (meaning you put more than 10% down, or even more than 20% down), you’ll be required to pay FHA MIP for 11 years or for the life of the loan, whichever happens first.

How to stop paying mortgage insurance…

...if you have an FHA Loan:
Because there is no option to cancel FHA mortgage insurance, it’s likely that your best option is to switch to a conventional loan by refinancing. You may be able to do this once your LTV ratio is lower, or if you’ve improved your credit score. There are a variety of conventional loan options out there, including affordable loans like HomeReady. (You can learn more about HomeReady here.) By switching into a conventional loan, you’ll be eligible to cancel mortgage insurance when you reach 80% LTV (or if you’ve already hit 80% LTV, you won’t have to pay it at all). Another potential benefit: PMI rates are generally cheaper than FHA rates for borrowers with good credit, according to the CFPB.1

…if you have lender-paid mortgage insurance:
While some loans advertise “lender-paid” mortgage insurance, the reality is you’re still paying for it. In this instance, the mortgage insurance was paid in full when your loan was issued, and you repay it every month in the form of a slightly higher interest rate. This might have been the best decision for you when you first got your loan, but you may want to consider refinancing out of this loan if you qualify for a new loan with no mortgage insurance, a lower interest rate, or even both.

...if your home has increased in value:
If home values in your area have gone up or if you’ve made significant home improvements, there’s a chance the value of your home (and your equity) has increased since buying. That means you might be closer to an 80% LTV (and a loan without mortgage insurance) than you think. Here again, refinancing may be the right option. If your home value has increased enough, your new lender won’t require mortgage insurance after you refinance. In some situations, you may not need to refinance to take advantage of an increased home value: your current lender may be willing to remove your mortgage insurance if a new appraisal confirms the lowered LTV.

…if your finances have improved:
If you’ve built up savings or if your income has increased since you first got your loan, you could use that money to gradually prepay your mortgage principal until you reach 80% LTV and are eligible for PMI cancellation. Or if you’d like to pay off a chunk of your mortgage and refinance to take advantage of lower rates in one go, a “cash-in refinance” might be the answer. In this scenario, you’ll bring cash to the closing of your refinance and pay down your loan amount to get a new, PMI-free loan.

 Quote: If Mortgage Rates Are Lower Than When You Originally Got Your Mortgage, Refinancing May Not Only Remove Your Mortgage Insurance..."

What’s your best bet?

You’ve probably noticed that refinancing can often be used as a way to remove mortgage insurance. If mortgage rates are lower than when you originally got your mortgage, refinancing may not only remove your mortgage insurance, but also reduce your monthly interest payments. Just make sure that your refinance costs don't exceed the money you save by eliminating mortgage insurance. The easy way to determine that is by dividing the cost of refinancing by the monthly reduction in payment. (Remember that you may be able to roll the closing costs into your loan for a “no cost” refinance.) If you’d like to talk through your mortgage insurance removal options, our non-commissioned Mortgage Experts are here to help.

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