Mortgage Insurance (MI) or Private Mortgage Insurance (PMI), is an added expense for some homebuyers who have put less than 20% down. This insurance usually add hundreds of dollars to your monthly mortgage payment on top of principle, interest, taxes, and homeowners insurance (PITI). In some cases this can stay on your home as long as you have the loan, but in most cases it can be eliminated – this is what gets us at Mortgage Analyzer up in the morning.
Recent legislation gives you the right to remove this additional insurance from your home loan in a few ways. First, you can have a predetermined MI/PMI termination at certain stages of home equity/loan paydown milestones, or you can petition the lender for removal when you reach ≥20% of home ownership. Exceptions are FHA loans with ≥90 LTV where MI stays on for the life of the loan (avoid these or refi out).
Mortgage Insurance Defined
MI/PMI is insurance on your mortgage that reduces the risk to the lender in the event you default on your mortgage. Because borrowers who put down less equity will have larger loans relative to the property value, these loans are inherently more risky hence why lenders want insurance (like a credit default swap – think The Big Short) to compensate them in the event of a default by the borrower.
Homebuyers who use a conventional mortgage with a down payment of less than 20 percent are usually required to get private mortgage insurance, or PMI. This is an added annual cost — about 0.3 percent to 1.5 percent of your mortgage, usually, although it can vary. According to Freddie Mac, each month, borrowers generally may pay between $30 and $70 for every $100,000 of the loan principal in PMI. How much you pay depends on your credit score and the amount of your down payment. Your PMI is recalculated each year based on the current size of your loan, so it will decrease as you pay the loan off. For FHA MI, these numbers are typically higher for higher credit borrowers but more favorable for lower credit score borrowers.
PMI and MI have mostly the same rules but some differences. Some private lenders offer conventional loans with small down payments that don’t require mortgage insurance but they offset this risk with higher interest rates.
Top 3 Ways to Eliminate Mortgage Insurance
Mortgage Analyzer’s top recommendation to homeowners looking to reduce or remove mortgage insurance
1st Strategy: Pay down your mortgage
Conventional PMI: Under current law, the mortgage lender or servicer is required to drop your PMI when one of two things happens:
The provider must automatically terminate PMI when your mortgage balance reaches 78 percent of the original purchase price, provided you are in good standing and haven’t missed any scheduled mortgage payments.
The lender or servicer is also required to stop the PMI at on the midway point of the term (so after 15 years of a 30 year loan). Even if your mortgage balance hasn’t yet reached 78 percent of the home’s original value, the PMI must be cancelled.
You can request cancellation of your FHA mortgage insurance when you meet certain requirements.
- The loan is in good standing
- The loan was originated before June 3, 2013
- You’ve paid your loan for 5 years if you have a > 15-year loan. If you have a 15-year loan, there’s no 5-year minimum.
- Your loan balance is at or below 78% of the last appraised value, usually the original purchase price.
- Your initial LTV was ≤90.
If you have owned a home with a FHA or conventional loan for some years, you may be eligible to have your mortgage insurance removed immediately. By law, if your mortgage is now 78% of your original purchase price, you should immediately contact your servicer or lender for elimination.
Chipping away at your loan balance with regular payments is a certain way to get rid of your insurance, but this can take a while on both FHA and conventional loans. On a 30-year fixed loan, it will take you about ten years to pay your loan down to 78% of the original purchase price. Making one time lump sum principal payments can help to speed this up but you must consider the opportunity cost as well.
Once you hit the enviable 78% loan-to-value ratio, you can potentially start saving hundreds per month, and keep your existing FHA loan and interest rate intact if your under that original 90% LTV threshold.
2nd Strategy: Request PMI cancellation when your LTV reaches 80%
Current law affords you the right to ask for PMI cancellation once your loan balance reaches 80 percent of the home’s original value. If you’re making payments as scheduled, you can find the date that you’ll get to 80 percent on your PMI disclosure form or request it from your loan servicer.
As mentioned previously, if you have the excess cash to spare, then lump sum or doubling up on principal payments can make sense depending on the opportunity cost and savings potential.
You may also be able to speed this up if your property value has increased while you have been paying down you loan.
If you are in a fast growing area, then it may be worth claiming that your LTV is at 80% now and requesting removal from the lender. You may have to pay for an appraisal which can cost between $300-800 depending on your area. This is a risk that you only want to take if you feel confident in your opinion of your home’s value. Our Mortgage-Analyzer tool can help with this assessment or if we can connect you with a home valuation expert in your area here.
An additional opportunity is presented by improving your home and boosting value which can help get you closer to the 80% LTV threshold while making for a better living space.
Unfortunately this option is not applicable to FHA MI but refinancing may be.
3rd Strategy: Refinance to get rid of mortgage insurance
With near all time low historical interest rates, refinancing is generally an appealing option depending on your interest rate. Simultaneously, you may be be able to drop or reduce your mortgage insurance (PMI/MI).
While PMI adjusts down year to year, FHA MI does not, and thus, it may be worth refinancing into a conventional loan that has lower mortgage insurance and adjust down as you paydown your loan.
So if you live in an area with rising home values, then even if it has only been a few years, your LTV may have decreased to 80% – the threshold were you can get refinance with no mortgage insurance.
The key with these refinancing decisions is this: how long will it take you to break-even on the cost to refinance? This can be calculated by figuring out how much monthly savings you will receive and dividing that by the closing costs.
For FHA there isn’t minimum time requirement rule but for conventional there can be an ownership period requirement but it is usually minimal.
At Mortgage-Analyzer, we believe in being more informed than your lender. Know your rights and exercise them. You can seek out mortgage insurance reductions or elimination. Home values fluctuate constantly and there has been a tremendous surge in all asset prices over the last decade. It is highly likely you can take advantage of these strategies and save real money that you can put to work.