With current interest rates at historic lows, many people are looking into refinancing their home or they’re preparing to purchase a home for the first time. If you don’t have a certain amount of money to put down or your credit is less than stellar, you could be stuck paying MIP or PMI mortgage insurance every month.
This extra cost doesn’t have to last forever, and it can be removed if you follow a few simple guidelines. Read on to learn how you can cancel your FHA or private mortgage insurance to get lower monthly mortgage costs.
FHA Mortgage Insurance
An FHA loan is backed by the federal government and typically includes something called MIP, or a mortgage insurance premium. Many borrowers think that this payment is permanent, however, it’s possible to have it removed in certain circumstances.
In order to be able to cancel your FHA mortgage loan insurance, there are a few pieces of criteria that must be met. First, your loan must be opened after June of 2013, and you must have originally made a down payment of less than 10-percent.
These loans are not automatically eligible for mortgage insurance cancellation, however, there are no restrictions on refinancing out the loan and into a conventional one without PMI. FHA loans never have a prepayment penalty, so you’re able to refinance whenever you want to.
For those who received an FHA loan before June of 2013, you’re eligible to cancel MIP after five years, but you must have 22% equity in the property. All payments must be paid on time in order to qualify.
For borrowers with loans originating after June 2013, you’ll be required to refinance your home into a conventional loan. Additionally, your current LTV (loan-to-value) ratio must be 80% or greater.
If you meet these qualifications, talk to a lender who can help you with the refinancing process. Borrowers with loans starting before June 2013 with enough equity should contact their mortgage holder for details about how to cancel their MIP.
PMI Mortgage Insurance Cancellation
Private mortgage insurance, or PMI mortgage insurance, can cost you anywhere from an additional $100 to $300 per month. This added cost is really for the benefit of the bank, and it does not protect you from things like foreclosure if you can’t make your mortgage payments.
Thankfully, you can cancel your PMI once you reach a certain equity threshold. The good news is that you don’t always need to refinance your current loan, since in some cases, the PMI will automatically fall off at a certain point.
If you have a conventional loan with a balance at or below 78% of the appraised value, your PMI should be removed automatically. Once your home reaches an LTV of 80%, you can request PMI cancellation from your lender in writing. You can’t call and ask to have it removed, so be prepared to send the request via certified letter and keep a copy for your records.
If you have an FHA loan, another option you have is to refinance it into a conventional loan with no PMI once your balance reaches 80% LTV. Another way to get the PMI removed is to refinance your current loan into a special program that offers terms without PMI requirements.
While your private mortgage insurance will drop as soon as you reach 78% LTV, you can have it removed sooner if you notify your lender. Once you reach 80% equity, contact them directly in writing and formally ask to have it removed. Keep in mind that in order for this to work, you’re responsible for contacting them rather than assuming it’ll drop off at the 80% threshold on its own.
Is Refinancing Worth the Effort?
If you’re aiming to say goodbye to PMI mortgage insurance forever, refinancing can be a good option. However, this is only beneficial if the savings will be greater than the closing costs associated with the refinancing of the loan.
When interest rates are low, you can get the added benefit of a lower mortgage payment, too. Think about how long you plan to stay in your home after you refinance.
People who are planning to sell within a few years might not benefit from a refinance. However, if you’re planning to live there for at least another five years or longer, refinancing to get rid of PMI is often a worthy effort. Ask about how you can get a refinance loan with no closing costs or see if you can roll the closing costs into the balance to help reduce your out-of-pocket costs.
The cost of PMI varies depending on your loan terms, but it typically ranges between 0.5% and 1.5% of the loan amount annually. For example, your PMI would cost approximately $1,000 to $3,000 each year on a $200,000 mortgage loan.
This equates to a savings of around $83 to $250 per month. Your individual PMI rate will depend on the size of your down payment and your credit score, but no matter what, removing it will help to put more liquidity in your pocket.
Say Goodbye to PMI
Take these tips into account if you’re looking to get rid of your MIP or your PMI mortgage insurance. With the right lender and some equity, you can get rid of this extra monthly expense to give you a positive cash flow that can be used for other things in your household.
If you’re interested in purchasing a new home or refinancing in the Portland area, be sure to contact us today to find out how we can help make your dreams come true.