Jeffrey Wade
If you're a homeowner, you may have had to take out mortgage insurance to protect your lender in the event that you default on your mortgage. This is known as Private Mortgage Insurance (PMI) for conventional loans and Mortgage Insurance Premium (MIP) for Federal Housing Administration (FHA) loans. While mortgage insurance is beneficial for lenders, it can add a significant cost to your monthly mortgage payments. Luckily, you are not required to make these payments forever. Here are some ways to end your mortgage insurance:
| Characteristics | Values |
|---|---|
| When does mortgage insurance end? | When the balance of the mortgage drops to 78% of the home's purchase price, or when the loan term is at its halfway point, whichever comes first. |
| How to end mortgage insurance early? | By refinancing, getting a reappraisal, or paying down your mortgage faster. |
| What is PMI? | Private Mortgage Insurance, a policy you must buy to protect your lender in case you default on your mortgage. |
| What is MIP? | Mortgage Insurance Premium, a similar policy to PMI, but for FHA loans. |
| How much does PMI cost? | 0.5% to 1% of your total loan amount per year, or $100 to $200 per month for a $250K home loan. |
| How much does MIP cost? | 0.15% to 0.75% of the loan amount per year, depending on factors such as the loan term, loan amount, and down payment. |
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What You'll Learn
Request cancellation when the mortgage balance reaches 80% of the original value
Private Mortgage Insurance (PMI) is a policy that protects lenders in the event that you default on your mortgage payments. It is usually required if you bought a home with less than 20% down.
According to the Homeowners Protection Act, you have the right to request that your lender cancels PMI when your mortgage balance reaches 80% of the original value of your home. This date should have been provided to you in writing on a PMI disclosure form when you received your mortgage. If you cannot find this form, contact your lender.
To make this request, you must submit a formal written request to your loan provider, along with documentation such as proof of home value and a solid payment history. You must also be current on your payments for the cancellation to be granted.
It is important to note that lenders may require you to certify that there are no junior liens (such as a second mortgage) on your home. Additionally, they may ask you to pay for an appraisal to ensure that the value of your home has not declined, and they can deny your request if you refuse.
If your lender refuses to remove PMI despite meeting the requirements, you may need to seek legal advice or consult a residential property lawyer to understand your options.
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Refinance to a conventional loan
If you have an FHA loan from the Federal Housing Administration, you pay for a Mortgage Insurance Premium (MIP) which you must pay for the life of the loan. However, if you refinance to a conventional loan, you can get rid of the MIP.
Homebuyers who put down less than 20% on a conventional loan must get private mortgage insurance (PMI). You can request to cancel PMI ahead of the scheduled date if you have made additional payments that reduce the principal balance of your mortgage to 80% of the original value of your home. The "original value" is either the contract sales price or the appraised value of your home at the time of purchase, whichever is lower. If you have refinanced, the "original value" is the appraised value at the time of refinancing.
You can build up equity in your home to at least 20% and then submit a written request to your servicer to cancel the PMI. You will need to provide evidence, such as an appraisal, that the value of your property has not declined below the original value.
You can also refinance to a new loan with a lower balance to help you reach the PMI cancellation window sooner. However, refinancing costs money and typically only makes sense if you can lower your interest rate.
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Get a reappraisal
Getting a reappraisal is one of the ways to get rid of private mortgage insurance (PMI). PMI is a policy you must buy to protect your lender in the event that you default on your mortgage, and you typically pay premiums as part of your monthly mortgage payment. It is required for conventional loans if you put less than 20% down on your home.
The value of your home may have increased due to rising home prices or improvements you've made, such as upgrading your kitchen or remodelling your bathroom. You can request a new appraisal to determine the current value of your home. Check with your lender for any rules or requirements before they order your appraisal.
Keep in mind that federal law requires mortgage lenders to automatically cancel PMI when the balance of the mortgage drops to 78% of the home's purchase price, or when the loan term reaches its halfway point, whichever comes first. You can ask for cancellation once your balance reaches 80% as long as your payments are up to date.
If you have an FHA loan from the Federal Housing Administration, you pay for a similar policy called a mortgage insurance premium (MIP). You may have to pay MIP for the life of the loan, but there are exceptions. If you put down at least 10%, you'll pay MIP for only 11 years. You can also refinance to a conventional loan to get rid of MIP.
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Wait for automatic cancellation
If you don't want to go through the hassle of requesting a cancellation, you can simply wait for your lender or servicer to cancel your private mortgage insurance (PMI) automatically. Federal law requires mortgage lenders to automatically cancel PMI when the balance of the mortgage drops to 78% of the home's purchase price, or when the loan term is at its halfway point, whichever comes first. You must be current on your monthly payments for automatic cancellation to occur.
Automatic cancellation is more likely to occur for people who have a mortgage with an interest-only period, principal forbearance, or a balloon payment. If you have an FHA loan, you'll pay mortgage insurance premiums (MIP) for either 11 years or the entire length of the loan, depending on the terms of the loan. If you took out an FHA loan and put down at least 10%, you'll pay MIP for only 11 years. You can also refinance to a conventional loan to get rid of MIP.
If your loan has met certain conditions and your loan-to-original-value (LTOV) ratio falls below 80%, you may be able to request cancellation. In this case, you may submit a written request to have your mortgage servicer cancel your PMI. For a refinance transaction, the "original value" is the appraised value. You can also request cancellation ahead of the scheduled date if you have made additional payments that reduce the principal balance of your mortgage to 80% of the original value of your home.
Your servicer is legally required to grant your request to cancel your PMI as long as you meet certain criteria. You may need to provide evidence (e.g., an appraisal) that the value of your property hasn't declined below the original value of the home. If you don't make a request, your servicer must automatically terminate PMI on the date when your principal balance is scheduled to reach 78% of the original value of your home.
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Pay down your mortgage faster
Paying off your mortgage faster can help you save money in the long term by accruing less interest. Here are some strategies to pay off your mortgage faster:
- Making extra payments towards your principal balance on your mortgage loan can help you save money on interest and pay off your loan faster. You can budget extra money each month to put towards your principal balance. However, you should check with your lender whether there is a prepayment penalty for paying off your mortgage early.
- If interest rates decline, you may be able to reduce the amount you pay towards interest by refinancing your mortgage.
- You can increase your monthly payments by a small amount, such as $1 each month. For example, paying $900 the first month, $901 the second month, and so on. This strategy could reduce the term of your mortgage by several years.
- You can also round up your monthly payments to the next highest $100 amount. For example, paying $800 instead of $743, or $900 instead of $860.
- Making an extra mortgage payment each year could significantly reduce the term of your loan. This can be done in a budget-friendly way by paying 1/12 extra each month. For example, by paying $975 each month on a $900 mortgage payment, you will have paid the equivalent of an extra payment by the end of the year.
- Send any unexpected windfalls, such as holiday bonuses, tax returns, or credit card rewards, straight to your mortgage company.
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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.
There are a few ways to end mortgage insurance. You can wait for your lender to cancel it automatically, request early cancellation, get a reappraisal, or refinance the mortgage.
Your lender must cancel your mortgage insurance when your loan-to-value (LTV) ratio reaches 78%. This usually happens halfway through your loan term.
Refinancing is when you book a new loan to replace the existing mortgage, usually at a lower rate. If you refinance and reach 20% equity with the new loan, your mortgage insurance can be removed.
