3 ways to get rid of mortgage insurance

Being a homeowner comes with many financial benefits. Owning a home helps you build credit, it can be a form of long-term savings, and if property values rise, it can grow your wealth.

But becoming a homeowner can be tough, especially if you don’t have enough cash for a down payment. That’s where mortgage insurance comes in to play.

What is mortgage insurance?

Mortgage insurance is a way for lenders to take on more risky loans. It protects them in case you default on payments. You probably had to add private mortgage insurance (PMI) to your conventional loan if you bought a home with less than 20% down. Or if you have an FHA loan you have a similar payment called a mortgage insurance premium (MIP).

These payments can come to hundreds of dollars each month. And you are required to make them until you meet certain financial conditions of your loan.
 

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How is mortgage insurance calculated?

The amount you pay is based on several factors including:

• Amount of your original down payment
• Your credit score
• Current loan type
• Your debt-to-income ratio

As a rule, you can expect to pay 0.5% to 1% of your total loan amount per year in mortgage insurance. For example, if you have a $250K home loan, that will equal anywhere from $1,250 to $2,500 per year or between $104 and $208 per month.

If your payments are current and in good standing, your lender is required to cancel your PMI on the date your loan is scheduled to reach 78% of the original value of your home. If you have an FHA loan, you’ll pay MIP for either 11 years or the entire length of the loan, depending on the terms of the loan.

What can I do to cancel my payments sooner?

The good news is that there are steps you can take to remove your monthly mortgage insurance payments.

1. Ask to cancel your PMI: If your loan has met certain conditions and your loan to original value (LTOV) ratio falls below 80%, you may submit a written request to have your mortgage servicer cancel your PMI. For more information about canceling your PMI, contact your mortgage servicer. You can calculate your LTOV by dividing your current unpaid principal balance by the purchase price of your home or the appraised value at closing, whichever is less.
   • Purchase example – If the purchase price of your home was $195,000 (and less than the appraised value) and you owe $156,000 on your principal loan balance, then your LTOV would be 80%.
   • Refinance example – If the appraised value of your home at closing was $195,000 and you have $156,000 remaining principal balance on your mortgage, then your LTOV would be 80%.
2. Get a new appraisal: The value of your home may have gone up due to rising home prices or because you’ve made improvements like upgrading your kitchen or remodeling your bathroom. Make sure to check with your lender for any rules or requirements before they order your appraisal.
3. Refinance: With today’s home values soaring, you may have the equity you need to refinance and avoid paying PMI , or you may want to refinance from an FHA to a conventional loan, eliminating your MIP. And, if you have other high interest debt, you may be able to consolidate it into your new home loan, possibly saving you hundreds more per month.

If you’re ready to learn more about mortgages and refinancing, or have questions about eliminating PMI or MIP, we're here to help. Reach out to a mortgage loan officer to discuss your situation over the phone, via email or within a branch.