Haris Ashley
Private mortgage insurance (PMI) is a type of insurance that homebuyers who put down less than 20% on a conventional loan must purchase. It protects lenders in case the buyer defaults on payments. While PMI is typically associated with conventional loans, those with Federal Housing Administration (FHA) loans may also have to pay a similar type of insurance called a mortgage insurance premium (MIP). The rules for removing PMI or MIP from your loan vary depending on the type of loan you have and who purchased it. In some cases, mortgage insurance will automatically be terminated once your loan reaches 78% of the original value of your home. However, you may also need to submit a written request to your lender to cancel it.
| Characteristics | Values |
|---|---|
| When does mortgage insurance drop off automatically? | When the principal balance is scheduled to reach 78% of the original value of the home. |
| Who does this apply to? | This applies to conventional loans. |
| What if I have an FHA loan? | If you have an FHA loan, you will pay MIP for either 11 years or the entire length of the loan, depending on the terms of the loan. |
| What if I have a VA loan? | VA loans do not have mortgage insurance, but they come with funding or guarantee fees. |
| What if I have a USDA loan? | USDA loans do not have mortgage insurance, but they also come with funding or guarantee fees. |
| What is the cost of mortgage insurance? | Typically, you can expect to pay 0.5%-1% of your total loan amount per year in mortgage insurance. |
| How can I get rid of mortgage insurance? | You can get rid of mortgage insurance by refinancing, paying down your mortgage, or reappraising your home. |
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What You'll Learn
Private mortgage insurance (PMI)
PMI can be paid through a monthly fee added to the borrower's mortgage payment, or the lender may pay the premiums and give the borrower a higher rate than they would have had otherwise. It can also be paid through a combination of upfront and monthly payments. The amount paid for PMI depends on the loan and down payment size, the type of mortgage, and the borrower's credit score.
PMI can be removed from a loan. If the lender is paying for the insurance, different rules apply. Borrowers have the right to ask their servicer to cancel PMI on the date the principal balance of their mortgage is scheduled to fall to 80% of the original value of their home. The servicer must automatically terminate PMI on the date when the principal balance is scheduled to reach 78% of the original value of the home, or one month past the midpoint of the loan term, whichever comes first. The borrower must be current on their payments for automatic termination to occur.
FHA loans are associated with mortgage insurance premiums (MIP), which are similar to PMI but must be paid regardless of the amount put down on the loan. MIP may be paid upfront at closing or built into the loan amount, and there are also annual premiums paid on a monthly basis.
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Mortgage protection insurance (MPI)
MPI is different from other types of insurance, such as life insurance or short-term and long-term disability insurance, in that it specifically covers the remaining mortgage payments in the event of the policyholder's death or, in some cases, disability or critical illness. Some MPI policies may also offer coverage in situations where the policyholder cannot pay their mortgage due to unemployment. The payout from an MPI policy decreases over time as the policyholder makes payments towards their mortgage.
The cost of MPI depends on factors such as the number of years left on the mortgage, the mortgage balance, the policyholder's age, and the property location. MPI can be purchased through insurance companies or mortgage lenders, and eligible veterans may be able to obtain mortgage life insurance through the U.S. Department of Veterans Affairs.
While MPI offers financial security and peace of mind, it has some drawbacks. MPI policies lack flexibility, as they only cover the remaining mortgage balance and do not provide funds for other expenses. Additionally, MPI tends to be more expensive than traditional life insurance policies due to its more flexible underwriting criteria, which do not include a medical exam requirement.
In summary, MPI is a specialised form of insurance that ensures your mortgage will be paid off in the event of your death or disability. While it offers peace of mind and easier qualification, it may be more expensive and less flexible than traditional life insurance policies. Whether MPI is right for you depends on your personal situation and the level of financial protection you seek for your loved ones.
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Mortgage insurance premiums (MIP)
MIP is paid by homeowners who take out loans backed by the FHA. There are two types of MIP: upfront MIP and annual MIP. The upfront MIP is typically 1-1.75% of the total loan amount and is due at closing. The annual MIP ranges from 0.15% to 0.75% of the loan amount and is paid on a monthly basis. For FHA Streamline loans with the previous loan closed on or prior to May 31, 2009, the upfront MIP is 0.01% of the loan amount, and the annual MIP is 0.55%.
For loans originated after June 3, 2013, if you made a down payment of less than 10% of the home's value, you must pay the MIP for the life of the loan. The only way to remove the MIP on an FHA loan is to refinance it into a non-FHA product. For loans made prior to June 3, 2013, MIP falls off when you reach 22% equity based on the original value of the home. If your term is more than 15 years, you must have paid premiums for at least 5 years.
It is important to note that MIP is different from PMI, which is typically associated with conventional loans. PMI can be removed once the homeowner has built up at least 20% equity in their home or after the loan is 15 years old. However, with MIP, borrowers may be paying it for the life of the loan, depending on the down payment and the loan's origination date.
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FHA loans
Loans insured by the Federal Housing Administration, or FHA loans, require borrowers to pay FHA mortgage insurance premiums (MIP). These are additional fees that borrowers pay both upfront and over the course of the mortgage term, regardless of the down payment amount.
FHA mortgage insurance includes an upfront premium that is often paid at closing and an annual premium that may need to be paid for the life of the loan. If you put down at least 10% of the loan amount, your annual MIP will be removed after 11 years. However, if you put down less than 10%, you will need to refinance to a conventional loan to eliminate these monthly premiums.
One way to remove FHA mortgage insurance is to refinance to a conventional loan. To be eligible for FHA mortgage insurance removal, your loan must be in good standing, and you must have a good payment history. Additionally, your property must be your principal residence, not a vacation home or investment property.
Another option to remove FHA mortgage insurance is to build equity in your home. If you have sufficient equity (generally 20% or more), you can refinance into a conventional loan without any mortgage insurance required. You can also tap into your home equity to access funds for home improvements, debt consolidation, or other financial goals.
It is important to note that refinancing won't always save you money, even if you get rid of FHA MIP. If your new refinance rate exceeds your current rate, you may end up paying more in interest on your new loan than you are currently paying in MIP. Therefore, it is recommended to shop around and compare offers from multiple lenders before making a decision.
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Conventional loans
Private mortgage insurance (PMI) is usually required for conventional loans when the buyer makes a down payment of less than 20% of the home's value. This insurance protects the lender if the buyer defaults on their loan payments. It is an additional monthly cost that is rolled into the mortgage payment and protects only the lender, not the borrower.
PMI can be removed from your monthly payments in two ways: when you pay your loan balance down below 80% of the purchase price of your home, or once you have achieved 20% equity in your home. This means that when your loan balance reaches 78% of the original value, PMI may be terminated automatically. However, to potentially avoid paying more than necessary, it is recommended to contact your loan servicer when your balance hits 80% of the original value to determine if you are eligible to terminate PMI.
To request termination based on the equity in your home's current value, you must contact your loan servicer to discuss options for termination of PMI. In some cases, to remove PMI, you'll need to show that you haven't made a payment 30 days or more past the due date in the last year and no payment 60 days or more past due in the past two years.
It is important to note that PMI cancellation guidelines may vary depending on the loan investor. However, these guidelines cannot be less favourable to the borrower than the standard guidelines provided by the Consumer Financial Protection Bureau.
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Frequently asked questions
Mortgage insurance is a way for lenders to take on more risky loans. It protects them in case the borrower defaults on payments. It is usually paid by the borrower through a monthly fee added to their mortgage payment.
Yes, mortgage insurance can drop off automatically when certain conditions are met. For conventional loans, this happens when the loan-to-value (LTV) ratio reaches 78% or 80% of the original value of the home. For multi-unit properties or rentals, mortgage insurance is automatically cancelled halfway through the loan term.
Private Mortgage Insurance (PMI) applies to conventional loans. Mortgage Insurance Premium (MIP) is associated with Federal Housing Administration (FHA) loans and must be paid regardless of the amount put down on the loan.
Compare your mortgage statements to see if you are being charged for mortgage insurance. If you have a conventional loan and bought your home with less than 20% down, you likely have PMI. If you have an FHA loan, you likely have MIP.
