Refinance your home and stop paying for mortgage insurance
If you bought your home with a low down payment, you’re likely paying private mortgage insurance (PMI). And if you have an FHA loan, you may be paying a mortgage insurance premium (MIP).
Either way, there’s a good chance you’d like to get rid of your mortgage insurance.
One way to do that could be with a mortgage refinance.
A refinance can reset your loan and remove PMI or MIP if you’ve built enough equity in the home. Doing so can save you plenty of money in the short- and long-term.
Refinancing doesn’t just affect mortgage insurance, either. Refinancing now could seriously reduce your interest payments thanks to historically low rates.
Of course, a refinance can also be costly and complicated. Explore your options, compare rates and closing costs, and choose the most effective method for you.Compare refinance interest rates. Start here (Dec 12th, 2019)
Table of contents (Skip to section…)
- Refinance your home and stop paying for mortgage insurance
- The refinance strategy
- How much a refinance can save you
- What to consider before refinancing to get rid of mortgage insurance
- Background on private mortgage insurance (PMI)
- Background on mortgage insurance premium (MIP)
- Your next steps to canceling PMI or MIP
The refinance strategy
PMI and MIP are generally required for a set amount of time — either until you build enough equity in the home or surpass a certain term length.
Provided you meet these criteria, mortgage insurance can sometimes go away automatically. (More on that below.)
But for homeowners who want to get rid of mortgage insurance faster, there might be another way: with a mortgage refinance.
“After sufficient equity has built up on your property, refinancing from an FHA or conventional loan to a new conventional loan would eliminate MIP or PMI payments,” says Wendy Stockwell, VP of operations support and product development at Embrace Home Loans.
“This is possible as long as your LTV is at 80% or less.”
Stockwell notes that it’s also possible to refinance into a different program — one that doesn’t require MIP or PMI, even with an LTV over 80%.
Here are just a few examples of mortgage loan programs that don’t require mortgage insurance*:
- Neighborhood Assistance Corporation of America (NACA) Best in America mortgage
- Bank of America Affordable Loan Solution® mortgage
- Flagstar Bank Professional Loan mortgage
- CitiMortgage HomeRun mortgage
*Programs current at the time this article was published. Loan programs are subject to change
“The interest rate [on non-conforming loan products] may be slightly higher than on a conventional loan,” Stockwell says. “But the elimination of mortgage insurance payments ends up reducing your total monthly mortgage payment.”Verify your refinance rate. Start here (Dec 12th, 2019)
How much a refinance can save you
A PMI refinance or FHA refinance can yield big savings, depending on your current rate and balance.
“Let’s say your current home value is $250,000,” says Mike Scott, senior mortgage loan originator for Independent Bank. “You have an FHA loan with a current balance of $195,000 and a rate of 4.25%. And you have 27 years left on the loan.”
The monthly principal and interest you pay on this loan is just over $1,000, Scott points out. “But the MIP you are required to pay adds another $140 a month.”
You decide to refinance to a new conventional loan in the amount of $200,000. Your rate is 3.75% for 30 years. Assume the new loan rolls closing costs and other prepaid items into the loan.
“You’re starting over with another 30-year loan. But now your principal and interest monthly payment is $930 a month, with no MIP required. That’s a savings of [over $200] a month — at least initially,” Scott says.
|Original mortgage (FHA)||Refinanced mortgage (conventional)|
*Monthly payments shown here include principal and interest only, and are meant for sample purposes. Your own payments will vary.
What to consider before refinancing to get rid of mortgage insurance
That’s not to say that a PMI refinance or FHA refinance will always be the right move.
“You need to make sure refinancing won’t cost you more than you save.”
Be aware, too, that refinancing to a new FHA loan can add upfront costs that might outweigh your savings.
“With an FHA loan you pay your MIP up front. When you refinance an FHA loan after 3 years you will have to pay that MIP up front again” cautions Realtor and real estate attorney Bruce Ailion.
Ailion continues: “You should do a calculation of the savings versus costs to see how long it will take for the savings to cover the cost of the new loan. If it is longer than you will probably stay in the home, it’s probably not a smart decision to refinance.”
Another caveat? If you still owe more than 80% of the value of your existing home, it may not be as beneficial to refinance.
“Plus, if your credit score is below 700, note that conventional loans through Fannie Mae and Freddie Mac charge loan level pricing adjusters,” adds Scott. “This may knock the new interest rate up compared to what you are currently paying.”
Background on private mortgage insurance (PMI)
Stockwell says that borrowers are required to pay PMI on conventional loans “when more than 80% of the equity in the home is being borrowed.”
“PMI is paid either monthly or via a full premium payment at the time of closing,” she explains.
But there’s a key difference between mortgage insurance and other common types of insurance.
Banks and lenders charge PMI or MIP to protect their interests — not yours.
“It protects lenders in case you potentially default on your loan,” says Baker. That means any potential payout would go to your mortgage lender.
Generally, PMI will drop off automatically, either when your loan-to-value ratio reaches 78% or when you reach the midway point in your loan term.
To cancel PMI, “you typically have to reach the 80% mark in terms of loan-to-value (LTV),” says Scott. “PMI will drop off automatically once your LTV reaches 78%.” He adds that it is typically the original value of your home that is considered.
Alternatively, PMI can be canceled at your request once the equity in your home reaches 20% of the purchase price or appraised value.
“Or, PMI will be terminated once you reach the midpoint of your amortization. So, for a 30-year loan, at the midway point of 15 years PMI should automatically cancel,” Baker says.
Background on mortgage insurance premium (MIP)
Unlike private mortgage insurance, mortgage insurance premium (MIP) is charged exclusively on FHA loans.
“MIP payments are split up. First, you pay an initial upfront premium at closing. The remaining premium is amortized monthly over the life of your loan,” says Stockwell.
MIP must be paid for the full loan term on FHA mortgages with a loan-to-value ratio greater than 90%. With an LTV from 70-90%, it must be paid for 11 years.
Note that on FHA loans with LTV ratios between 70% and 90%, MIP is required to be paid for 11 years.
“But with LTV’s at 90.01% or more, the MIP must be paid for the entire loan term. So if you have an LTV of, say 91%, and you have a 30-year FHA loan, you’ll pay MIP for 360 payments,” says Stockwell. This is true unless you refinance or pay off your mortgage early.
If you have an FHA loan, and build more than 30% equity in your home before the required 11-year MIP period is up, a refinance could help you ditch the insurance costs early.
Your next steps to canceling PMI or MIP
Refinancing can cut your mortgage costs by a significant margin.
In addition to getting rid of mortgage insurance, you could potentially refinance into a much lower rate and save on interest over the life of the loan.
So, is a refinance the right decision for you? We recommend comparing rates and closing costs from at least three lenders to find out. Your savings should be big enough to offset the upfront costs of a refinance.Compare rates from major lenders. Start here (Dec 12th, 2019)