How to Get Rid of Mortgage Insurance
So you want to break up with your monthly mortgage insurance—we don’t blame you! When you purchased your home, there’s a good chance you didn’t have 20% to put down, right? Mortgage insurance is a great option, in that it allows buyers to increase their purchasing power, but comes with an unfortunate side effect of additional monthly fees.
Every situation is different, so it is important to understand your loan, to determine your options for dropping your mortgage insurance. Below are the greatest factors affecting your ability to say “Sayonara” to your mortgage insurance (MI).
• Type of mortgage insurance you’re paying
• Which lender holds your loan
• Age of your loan (time since closing)
• Your loan-to-value ratio (LTV)
• The property type
• Whether or not your property value has increased
Types of Mortgage Insurance
If you’re paying a monthly fee on a conventional loan, it is called private mortgage insurance (PMI). If you paid an upfront fee at close and a monthly fee on an FHA loan, it is called a mortgage insurance premium (MIP).
Who Owns Your Loan?
If you have a Conventional loan, is it Fannie Mae or Freddie Mac? This is important because they have different rules for when MI can be removed. If you have an FHA loan, you will need to know its age and the percentage of down payment you gave at close.
What is Your LTV?
The Loan-to-Value ratio is essentially the financed amount divided by your home’s value, expressed as a percentage. Let’s say for example that you purchased your home for $200,000 with 10% down ($20,000). You financed $180,000 of the $200,000 purchase price, which gives you a loan-to-value ratio of 90%. Your LTV will decrease as you make payments, as well as when your property value increases.
Has Your Property Increased in Value?
If you’ve made considerable improvements to your home, it has probably gone up in value! You’ll need to order a new appraisal to confirm the updated value, which generally costs between $400-$600 out of pocket.
Canceling MIP on your FHA Loan
If you closed on your loan on or after June 3, 2013 and you put less than 10% down, MIP can never be removed. With a down payment of 10% or more, you’re still required to pay MIP for a minimum of 11 years. If your loan closed before that date, your MIP will be automatically cancelled when your LTV reaches 78%, but only after you’ve paid the MIP for a minimum of 5 years, and only if you have not had any late payments in the last year. In most cases, the only way to stop paying MIP on an FHA loan is to refinance your mortgage.
Canceling PMI on your Conventional Loan
Ditching the PMI on a conventional loan is easier and more flexible than on an FHA loan. Your MI will be cancelled automatically as soon as your LTV reaches 78% OR when you reach the midpoint of your mortgage (15 years into a 30 year mortgage). Again, you must be current on your payments for the cancellation to occur.
If you pay close attention to your mortgage statements and are anxious to kick your MI to the curb, you can request cancellation once your LTV reaches 80%. It is also important to note that while Fannie Mae allows homeowners to make extra payments to get to 80% LTV faster, Freddie Mac does not.
As mentioned above, if you’ve made considerable improvements to your property, you may be able to remove PMI much sooner. You’ll need to order a new appraisal to document all improvements, but as long as your LTV is below 75% or less (for Fannie Mae) or 80% (for Freddie Mac), your PMI will be removed!
Have a specific scenario you’d like to run past us? Give us a call to speak with one of our licensed loan officers. We would love to recommend the best loan program for you and your situation.
Get More Information
To apply for a Mortgage or Refinance call Riverbank Finance today at 1-800-555-2098.