When buying a home, your focus is often on getting the deal done with as low a down payment as possible. While that’s a savvy move, it can come with the added expense of a monthly insurance premium when you purchase with a down payment that’s less than 20 percent.
What you pay in insurance depends on which mortgage program you use. For conventional mortgages, you pay private mortgage insurance (PMI). When you have a Federal Housing Administration (FHA) loan, you pay a mortgage insurance premium (MIP). Both programs, however, offer options for eliminating insurance once your home equity reaches certain levels and you meet certain requirements.
Three Paths to Moving on From Mortgage Insurance
With the recent rise in housing values across the country, now might be a good time to revisit your home’s current market value to see if you have sufficient home equity to request the removal of your mortgage insurance. The rules for doing so, however, depend on the type of mortgage you have and when it was originated. Here’s a summary of what you can expect with each of your options.
1. Eliminating PMI
Under the Homeowners Protection Act of 1998 (HPA), your PMI premiums will automatically end once your loan balance declines to 78 percent of your original loan value if you have had no payments that were late by 30 days within the last year or over 60 days late within the prior two years. However, you can request to have PMI removed as soon as your loan balance reaches the 80 percent level as long as you can support the rise in your home equity through a new assessment of your home value.
2. Canceling MIP
Canceling insurance on FHA loans will depend on when your mortgage was originally made.
- To eliminate MIP on mortgages closed between July 1991 and December 2000, you will have to refinance into a new loan.
- For FHA loans applied for between January 2001 and June 2013, removing MIP requires three conditions to be met:
- You’ve paid MIP for at least five years on this mortgage.
- You’ve had no late payments in the last 12 months.
- Your loan-to-value (LTV) based on the original value of your home is 78 percent.
- On mortgages that were applied for after June 2013:
- MIP will be removed after 11 years if the original loan amount involved an LTV of less than 90 percent.
- In cases where the amount originally borrowed represented an LTV of 90 percent or more, MIP will exist as long as the loan does.
There is another option you can pursue to remove mortgage insurance from your life: refinancing. Provided the market value of your home has appreciated sufficiently or you have savings you can add to the transaction that will reduce the LTV to 80 percent, this option could remove the insurance premiums and potentially improve your mortgage terms, lowering your monthly housing expense to a greater degree.
To identify the option that works best with your current financial circumstances and goals, you may want to reach out to your Loan Officer. He or she can provide guidance on the best way to manage your mortgage in the current real estate environment. The extra effort can be well worth the time. After all, the money you save on mortgage insurance premiums is money you can divert toward meeting your other expenses or financial goals, like boosting retirement savings.