How to Remove PMI from Your Mortgage
Get Rid of Mortgage Insurance on FHA and Conventional Loans
When homeowners are paying for mortgage insurance, they often wonder how to eliminate it from their monthly payments. The options for removing mortgage insurance vary depending on the type of mortgage you have.
FHA loans require mortgage insurance premiums (MIP), while Conventional loans involve private mortgage insurance (PMI). While they serve a similar purpose, the rules for removal are different. Read on to learn more!
How to Remove Mortgage Insurance Premiums (MIP) from an FHA Loan
FHA loans are mortgages issued by private lenders and backed by the Federal Housing Administration (FHA). Homeowners with an FHA loan must pay an upfront MIP and annual MIP.
- Down Payment Implications: If you made a down payment of 10% or more on your FHA loan, you must pay MIP for 11 years. If your down payment was less than 10%, MIP is required for the entire loan term. Different rules apply for FHA loans closed before June 3, 2013, and you can find more information about those on the HUD website.
- Home Equity Doesn’t Matter: Unlike Conventional loans, the value of your home equity does not affect your FHA MIP. Therefore, having 20% equity won’t allow you to cancel MIP. As a result, some homeowners with FHA loans consider refinancing to a Conventional loan to eliminate MIP.
- Refinancing to a Conventional Loan: To remove MIP by refinancing, you’ll need at least 20% equity in your home when moving to a Conventional mortgage. Before considering this option, evaluate your home equity value. Also, compare the closing costs associated with refinancing against the costs of continuing to pay MIP. Freddie Mac reports that average closing costs for mortgage refinances are about $5,000, although these can vary by state and loan amount. Ensure that the closing costs make sense for your financial situation. Refinancing could also help lower your interest rate, but remember that the total finance charges may increase over the life of the loan.
How to Remove Private Mortgage Insurance (PMI) from a Conventional Loan
Many homeowners have Conventional loans, also known as "traditional mortgages." When purchasing a home with a Conventional loan, PMI is required unless your down payment is at least 20%. This requirement holds true for refinancing as well; you need a minimum of 20% home equity to avoid PMI.
- Requesting PMI Removal: Good news! You can request your lender to remove PMI once your loan’s principal balance reaches 80% of the property’s original value. To initiate the removal, submit a written request to your lender. You must also be current on your loan and have a positive payment history for your request to be approved.
Wait for Automatic Removal of PMI
Your lender is obligated to remove PMI from your mortgage once the principal balance reaches 78% of the property's original value. If you don't submit a request to eliminate PMI when your principal balance hits 80%, the lender must automatically remove it when it reaches 78%. Again, you need to be current on your loan to qualify for automatic termination of PMI.
Refinancing to Remove PMI
If you’re considering refinancing to remove PMI, be aware that you typically need at least 20% equity in your home. The rules governing the removal of MIP are different for FHA loans, so refinancing to a Conventional loan may be the most viable option for removing MIP in this scenario.