Are you paying too much for your mortgage?
No, we’re not talking about the rate on your loan. Instead, we’re talking about mortgage insurance and premiums.
Many mortgages require the buyer to pay extra each month in order to protect the lender. But what about protecting the buyer from these annoying fees?
Fortunately, it’s possible to cancel FHA MIP and mortgage PMI. Keep reading to learn how you can save money each month!
What Is MIP?
Before you can cancel these things, you must understand what they are. We’ll start with MIP.
MIP is short for “mortgage insurance premium.” It is something that is currently built into every FHA loan.
The mortgage insurance premium is a way to protect the lender. With it, they take less of a hit if the buyer ends up defaulting on the loan.
Unlike PMI (more on that in a minute), the MIP lasts for the entire lifetime of the FHA loan. This is meant to compensate for the fact that buyers only have to put down 3.5% of a home’s value to get an FHA loan.
The low down payment opens doors for many people, but it opens the lender to risk. The MIP helps mitigate that risk, but it’s definitely worth it for buyers to cancel that premium as soon as possible.
What Is PMI?
PMI (private mortgage insurance) is very similar to MIP, but it is not limited to FHA loans. Instead, a PMI is typically required of any mortgage where the buyer puts down less than 20% of the home’s value.
The logic behind the PMI is very similar as well. Lenders see buyers who put down less than 20% as being a relative risk to the bank. To compensate for that risk, they charge extra in the form of the PMI.
Fortunately, it’s a little easier for homeowners to cancel PMI than MIP. But you can’t really get started if you don’t know what the first steps are.
How to Cancel FHA MIP
If you took out an FHA loan, then you’re dealing with the mortgage insurance premium each month. You likely have a simple question: “Can I just cancel this?” The answer is “it depends on the loan.”
For an FHA loan that originated before June 3rd, 2013, you can cancel the MIP after you have paid at least 22% of the home’s value. This is definitely worthwhile for longer-term mortgages because cancellation can save you a lot of money over time.
What about FHA loans that originated on June 3rd, 2013, or later? For those, we have some bad news and some good news.
The bad news is that the MIP cannot be canceled outright. Even after you have paid 22% or more of the home’s value, the MIP endures on an FHA loan.
The good news is that after you have paid 20% or more of the home’s value, you can refinance into a traditional mortgage with no PMI. More good news: your home may have risen in value since you first bought it, meaning you may have more equity in it than you realize.
In that case, you may be able to refinance and get rid of your MIP that much sooner!
How to Cancel PMI: Let It Go
Unlike the FHA MIP, there are multiple options for getting rid of a PMI. The first option is also the easiest: let it happen naturally.
The lender is legally required to cancel your PMI after you have paid at least 22% of the home’s value. While there are ways to speed up that time table (see our ideas below), the simple truth is that the PMI will go away on its own.
How soon will that happen? That varies from buyer to buyer. It all comes down to the size of your down payment and the length of your mortgage.
You typically only have a PMI on a traditional mortgage is you put down less than 20% of the home’s value. And as we noted, the lender automatically cancels PMI after you pay 22% of the home’s value.
If you don’t want to wait quite as long, you can request early cancellation of your PMI. While the lender typically won’t cancel if you have paid less than 20%, you can still save yourself a few payments instead of waiting until you have paid 22%.
So far, we have focused on very straightforward ways of canceling your PMI. But there are some more creative options available to you.
Remodel the Home
We keep mentioning terms like “the home’s value.” In the eyes of the lender, your home’s value is likely to be whatever amount it was last appraised for.
Therefore, one thing you can do to get rid of PMI is to renovate your home. This may be simple moves to enhance curb appeal or major moves like overhauling the bathroom.
After you are done, you can request a new appraisal of the home. If it is assessed as more valuable than before, you will effectively improve your loan-to-value ratio.
With the improved ratio, you may be able to get rid of PMI even quicker.
Even if you aren’t seriously remodeling your home, it may be worth getting a new appraisal.
While it has slowed down, home values have steadily risen for most of the last decade. A home that you bought back in 2012 may be worth quite a bit more now than it was then.
With a new appraisal, you can discover exactly how much the home is worth. A higher value may help you cancel your PMI in a timelier manner.
One thing to keep in mind is that a new appraisal may cost a few hundred bucks, but if it can help you avoid many more years of paying for a PMI, it will be worth it.
Your Bottom Line
Now you know how to cancel FHA MIP and traditional mortgage PMI. But do you know how to get a killer rate on your next home?
We’re here to help you buy the Portland home you’ve always wanted. To see what we can do for you and your family, contact us today!