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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.
For many FHA case numbers assigned on or after June 3, 2013, annual MIP lasts 11 years when the original LTV is 90% or less, and for the loan term when it exceeds 90%. The controlling date is generally the FHA case-number assignment date, not simply the closing date. Older loans and special categories may follow different rules; contact your servicer.
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 ends the FHA loan and its MIP. The new conventional loan generally avoids PMI when its LTV is 80% or less; refinancing at a higher LTV may replace FHA MIP with conventional PMI. Compare the new rate, loan amount, itemized closing costs, and remaining repayment period with keeping the existing loan. Financed costs can affect LTV and total interest.
How to Remove Private Mortgage Insurance (PMI) from a Conventional Loan
Many homeowners have Conventional loans, also known as "traditional mortgages." A standard conventional purchase generally avoids PMI with at least 20% down. For a standard conventional refinance, the new loan generally avoids PMI at 80% LTV or less, subject to the program's rules.
For many eligible conventional mortgages, request borrower-paid PMI cancellation in writing when the principal balance reaches 80% of the home's original value. Your servicer checks payment history, current status, property value, and applicable junior-lien requirements. Investor rules may also allow cancellation based on an increase in property value.
Wait for Automatic Removal of PMI
For many covered conventional mortgages, borrower-paid PMI must terminate when the balance is scheduled to reach 78% of the home's original value, provided payments are current. This scheduled date is different from reaching 78% early through extra payments. A separate final-termination rule generally applies after the midpoint of the original amortization schedule when the loan is current. Lender-paid insurance and other loan types have different rules.
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.