Homeowners

Trying to Save Money? Refinancing Your Home Loan May Help You Eliminate Your Mortgage Insurance

Lower mortgage interest rates are opening the door for millions of homeowners to refinance their home loans.

This may help homeowners lower their monthly payments and potentially eliminate mortgage insurance, especially if they have government-backed loans.

“It’s causing a boom of borrowers asking how they can take advantage of a drop in their monthly payment,” said Miguel Mouriz, vice president of sales for Florida and Puerto Rico at New American Funding. “There are definitely a lot of homeowners trying to save as much as they can.”

For borrowers with Federal Housing Administration (FHA) or U.S. Department of Agriculture (USDA) loans, the savings could be especially significant. Refinancing into a Conventional loan could help them get rid of mortgage insurance that can otherwise stick around for years or even the life of the loan.

So, what should homeowners with government loans consider?

What is a mortgage insurance premium?

If you have an FHA or USDA loan, chances are you’re paying a mortgage insurance premium. This fee protects the lender if you stop making payments. But it’s often harder to eliminate than private mortgage insurance on Conventional loans.

With an FHA loan, mortgage insurance includes two fees: an upfront charge equal to 1.75% of the loan amount, which most borrowers roll into their balance. There is also a monthly premium.

If you put down less than 10%, the monthly premium typically remains for the life of the loan, unless you refinance into a new loan. If you put down 10% or more, it is required for 11 years before you may be able to have it removed.

USDA loans work in a similar way. While the fees aren’t technically called mortgage insurance, they serve the same purpose. There is an upfront guarantee fee of 1% of the loan amount due at closing, which is often rolled into the loan.

Additionally, there is annual fee of 0.35% of the remaining balance, paid monthly.

With a Conventional loan, you can request your loan servicer drop private mortgage insurance once you’ve built up 20% equity. (Your servicer is the company you send your mortgage payments to and who you contact in the case of an emergency. It can be your lender, but is often a separate company.)

Mortgage insurance is required to be automatically removed once your Conventional loan balance reaches 78% of your home’s original value (about 22% equity), according to federal law.

How refinancing can help homeowners get rid of mortgage insurance

Refinancing into a Conventional loan may help homeowners eliminate mortgage insurance as well as lower their interest rates.

Homeowners with at least 20% equity in the property may avoid private mortgage insurance on the new loan. The equity can be a combination of property values rising as well as paying down the loan.

Those with less equity could still benefit. Refinancing into a Conventional loan replaces permanent FHA mortgage insurance with private mortgage insurance (PMI). The PMI may be removed once the homeowner reaches 20% equity. FHA loans don’t offer that option for borrowers who put down less than 10%.

It may make sense for homeowners to refinance if they’re saving at least $150 a month, said Mouriz.

“[They can] use those savings to pay toward the principal, make another investment or be more comfortable with their budget,” said Mouriz.

USDA borrowers may also be able to refinance into a Conventional mortgage, which could eliminate the fees that come with USDA loans.

However, homeowners need to make sure it makes financial sense for them to refinance, even if they will be saving money each month.

What to consider before refinancing your mortgage

It’s important to know that refinancing isn’t free. A new loan comes with closing costs, including an appraisal, lender, title, and other fees.

Homeowners should also consider how long they plan to stay in the home. If the monthly savings from a lower rate and eliminating mortgage insurance outweigh the upfront costs, refinancing may make sense. But for those planning to move within a few years, the upfront costs might outweigh the savings.

“When it’s time for refinancing, the most important thing is to put the homeowner in a better financial situation,” Mouriz said. “It’s a comparison of numbers. There is a cost to do business when you refinance. We want to make sure they are recapturing that money sooner rather than later and that we are not jeopardizing their equity.”

Miguel Mouriz NMLS # 283155