Mortgage insurance protects the lender against potential borrower default on mortgage loans. Private Mortgage Insurance or “PMI” is required with most conventional, non-government backed mortgages when the down payment is less than 20% of the home’s value. That means the loan to value ratio (LTV) is greater than 80%. The cost of PMI varies based on amount of the loan, the LTV ratio, a fixed or variable interest rate structure, and the borrower’s credit score. PMI can be paid one-time upfront or each month as part of the mortgage.
Mortgage Insurance Premiums or “MIP” is required with Federal Housing Administration (FHA) backed mortgages. MIP is required on all loans, but varies depending on the LTV of greater or less than 95%, mortgage term and whether the loan is greater or less than $625,000. Your credit rating doesn’t affect MIP. Part of MIP is paid one-time upfront at mortgage origination and the rest paid each month as part of the mortgage. Some government backed loans allow the borrower to wrap the upfront MIP into the ongoing mortgage to reduce upfront costs. MIP is paid for the life of the loan.
Veterans Affairs or VA mortgage loans don’t have mortgage insurance. Rather, there is a “funding fee” that offsets costs due to no down payments or mortgage insurance.
How to Get Rid of PMI
Your lender is required to cancel PMI at a 78% LTV ratio. Unless you tell the bank to consider market appreciation and home improvements you’ve made, it will stick with its original PMI cancellation schedule created when you got your loan. It is up to you to keep track of local real estate appreciation and make home improvements to increase home value. Once your confident that your LTV ratio has reached 78%, you can contact your lender to request cancellation of PMI.
Your mortgage lender should have provided information (PMI Disclosure Form) at the loan closing providing contact information and disclosing the right to PMI cancellation. Call your lender and find out about other rules, e.g. must be current on all payments, etc. costs, timing and potential penalties charged for cancelling PMI. Each lender’s process is a little different, so get the details and requirements to save time and headaches.
How To Get Rid of MIP
MIP is paid for the life of the loan. You may be eligible to refinance into a new FHA loan and lower mortgage insurance premiums if LTV has become lower than 95% or if the loan is now below certain thresholds. There are a number of FHA programs that help borrowers reduce their MIP and overall costs of the loan.
Or Just Refinance . . .
You may be eligible to refinance into a new conventional loan and eliminate mortgage insurance altogether. Refinancing works if 1] your home’s value has increased lowering the LTV ratio to <80% 2] interest rates have remained stable or decreased 3 ] there are no penalties to leave the current loan and 4] fees associated with refinancing, e.g. closing costs, title searches, appraisal and underwriting fees, etc. are less than savings from cancelling PMI. Consider a “no-closing cost” mortgage as an alternative. Talk to a mortgage broker or lending firm to learn more about the pro’s and con’s of refinancing.