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Get rid of PMI and lower your mortgage payment

Erik J. Martin
The Mortgage Reports contributor

Remove your mortgage insurance for good

PMI is a big cost for homeowners — often $100 to $300 extra per month.

Luckily, you’re not stuck with PMI forever.

Once you’ve built up some equity in your home, there are multiple ways to get rid of PMI and lower your monthly payments.

Some homeowners can simply request PMI cancellation; others will need to refinance into a loan that doesn’t require mortgage insurance.

With mortgage rates near historic lows, it’s a smart time to get rid of your PMI and lock in a lower rate at the same time.

Verify your PMI removal eligibility (Nov 27th, 2020)

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Four ways to get rid of PMI

Understandably, most homeowners would rather not pay for private mortgage insurance (PMI).

Luckily, there are multiple ways to get rid of PMI if you’re eligible. Not all homeowners have to refinance to get rid of mortgage insurance.

  1. Wait for PMI to automatically fall off — For conventional loans, PMI automatically drops off once the loan balance is at or below 78% of the home’s appraised value
  2. Request PMI cancellation — For conventional loans, you can request PMI removal at 80% loan-to-value ratio, instead of waiting for PMI to fall off at 78%
  3. Refinance into a conventional loan with no PMI — FHA loan holders can refinance to a conventional loan with no PMI once their mortgage balance reaches 80% loan-to-value ratio
  4. Refinance into a no-PMI mortgage — For loans that have not reached 80% LTV, it might be possible to refinance into a special loan program with no PMI

Homeowners with conventional loans have the easiest way to get rid of PMI. This mortgage insurance coverage will automatically fall off once the loan reaches 78% loan-to-value ratio (meaning you have 22% equity in the home).

Or, the homeowner can request that PMI be removed at 80% LTV instead of waiting for it to be taken off automatically when home equity reaches 22% (78% LTV).

When requesting PMI removal, the loan-to-value ratio may be calculated based on your home’s original purchase price or based on your original home appraisal (whichever is lower).

Or, if your home’s value has risen, you may be able to order another appraisal and remove PMI based on your home’s current value.

The process can vary by loan servicer, so speak to yours to learn about your options.

How to refinance to get rid of PMI

Removing mortgage insurance is not as easy for homeowners with FHA loans as it is for those with conventional mortgages.

If you have a mortgage backed by the Federal Housing Administration (FHA), your mortgage insurance (called MIP) will not automatically fall off.

MIP typically lasts the whole length of the loan — or 11 years, if you made a 10% or bigger down payment.

However, FHA homeowners still have options to get rid of mortgage insurance.

One way to get rid of PMI is 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.”

“After sufficient equity has built up on your property, refinancing… to a new conventional loan would eliminate MIP or PMI payments.” -Wendy Stockwell, vice president of Embrace Home Loans

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
  • 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.”

Find out if you can refinance out of PMI (Nov 27th, 2020)

How much a no-PMI refinance can save you

A no-PMI refinance can yield big savings, depending on your current rate and loan balance. Take a look at one example:

  Original mortgage (FHA) Refinanced mortgage (conventional)
Loan balance $195,000 $200,000
Interest rate 4.25% 3.75%
Mortgage insurance $138/mo $0
Monthly payment* $1,150 $930
Savings $220/month

*Monthly payments shown here include principal and interest only, and are meant for sample purposes. Your own payments will vary.

“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 mortgage 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.

Verify your new rate (Nov 27th, 2020)

What to consider before refinancing out of mortgage insurance

That’s not to say that a PMI refi or FHA refi will always be the right move.

“Refinancing to eliminate PMI will require paying closing costs, which can include host fees,” says Keith Baker, Mortgage Banking Program coordinator and faculty at North Lake College.

“You need to make sure refinancing won’t cost you more than you save.” –Keith Baker, Mortgage Banking Program Coordinator, North Lake College

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.”

“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.” –Bruce Ailion, Real Estate Attorney

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.”

Verify your new rate (Nov 27th, 2020)

Getting rid of private mortgage insurance (PMI) on conventional loans

If you have a conventional loan, and your down payment was less than 20%, you’re probably paying for 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.

Getting rid of mortgage insurance premium (MIP) on FHA loans

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% to 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.

PMI removal FAQ

How can I get rid of PMI without 20% down?

If you’re in the process of shopping for a loan, you can avoid PMI by choosing a special, no-PMI loan, or by getting an 80/10/10 “piggyback loan” that simulates a 20% down payment. If you already have a mortgage with PMI, you might be able to refinance into a no-PMI loan.

Can you get rid of PMI with a new appraisal?

If you refinance to get rid of PMI, the refinance process will include a new property value to verify that your loan is below 80% LTV. For homeowners with a conventional mortgage loan, you may be able to get rid of PMI with a new appraisal if your home value has risen enough to put you over 20% equity. However, some loan servicers will only re-evaluate PMI based only on the original appraisal. So contact your servicer directly to learn about your options.

Can you get rid of mortgage insurance on an FHA loan?

All FHA loans include MIP (the type of mortgage insurance that’s exclusive to FHA loans). But if you have sufficient home equity (at least 20%), you can refinance your FHA loan into a conventional loan without PMI.

Is mortgage insurance a waste of money?

PMI (or MIP on FHA loans) is usually worth your money if it lets you buy a home sooner. Almost all mortgage programs with less than 20% down require mortgage insurance. As a result, mortgage insurance is popular with homebuyers who don’t want to wait years to save up a huge down payment. Remember, mortgage insurance is not permanent. You can remove it or refinance out of it later on.

Do you never get PMI money back?

PMI premiums are non-refundable. Think of it like your car insurance: You pay premiums, and the insurer only pays out only if something bad happens. Except, your mortgage insurance doesn’t protect you. It protects your lender. So the homeowner never sees money back from their PMI.

The one exception to this rule is for FHA streamline refinances. A homeowner who refinances an existing FHA loan into a new FHA loan within three years, they can get a partial refund of the original loan’s upfront MIP payment. Qualifying for this loan is usually easy if you have a good payment history for the past three consecutive months.

Is it worth refinancing to remove mortgage insurance?  

It’s worth refinancing to remove PMI mortgage insurance if your savings will outweigh your refinance closing costs. The current climate of low interest rates offers a chance to get out of a loan with higher interest rates while also eliminating mortgage insurance. But you’d still need to consider how long you plan to stay in the house after refinancing. If it’s only a few years, you might spend more to refinance than you save. But if you’ll stay in the house another 5 or more years, refinancing out of PMI is often worth it. It may also be worthwhile if you can get a no-closing-cost refinance or roll closing costs into your loan balance.

How much is PMI on a $200K loan?

On average PMI costs 0.5% to 1.5% of the loan amount annually. That means on a $200K loan, PMI would cost about $1,000 to $3,000 each year. Or, $83 to $250 per month. PMI rates depend on your credit score and the size of your down payment.

Does a second mortgage also require PMI?

Getting a second mortgage such as a home equity loan or a home equity line of credit should not require additional PMI payments. PMI applies only to your home’s original lien. In fact, a second mortgage can even help you avoid PMI by covering a portion of your down payment on a home purchase, via the 80-10-10 “piggyback” mortgage option.

Is PMI based on the home’s original sales price or the home’s current value?

Different loan servicers use different strategies to determine your loan to value ratio (LTV). Some calculate LTV based on your home’s original purchase price; others rely on your original home appraisal. You could also pay for a new appraisal if your home’s current value has risen since you first purchased it. An appraisal may cost as much as $500 but the fee would be worth it if your home’s current value shows you have 20% home equity — enough equity to cancel PMI on a conventional mortgage.

Do USDA or VA loans require PMI?

USDA loans require their own brand of mortgage insurance. It tends to be less expensive than the FHA’s MIP requirements. VA loans do not require any type of ongoing mortgage insurance. VA borrowers do pay an upfront VA funding fee. Only active duty military members and veterans can use a VA loan.

Will a lender cancel PMI automatically?

The Homeowners Protection Act of 1998 requires that lenders disclose mortgage insurance requirements to homebuyers. The law requires loan servicers to cancel PMI automatically when your LTV falls to 78%. You can request PMI cancellation when the LTV falls to 80%.

How is LTV calculated?

You can find your loan-to-value ratio by dividing your current mortgage balance by your property value and then multiplying that answer by 100. For example, if you owe $175,000 and your house is worth $200,000, you’d divide $175,000 by $200,000 to get 0.875. Multiply that answer by 100 and you’ll have your LTV: 87.5%. The owner of this house would need to pay the mortgage balance down to $160,000 to achieve a LTV of 80% which is low enough to request PMI cancellation on a conventional loan.

What if my loan servicer won’t cancel PMI even after I reach 80% LTV?

First check your numbers. Your loan servicer may be using your original purchase price to calculate LTV. You may need a new appraisal to show your home’s current value has increased since your original home appraisal or sales price. If you think your loan servicer is violating the Homeowners Protection Act, report your experience to the Consumer Financial Protection Bureau.

Check your refinance eligibility

Refinancing to get rid of PMI can cut your mortgage costs by a large margin.

In addition to dropping mortgage insurance, you could potentially lower your rate significantly and save on interest over the life of the loan.

Today’s rates are at historic lows, so it’s a great time to get rid of private mortgage insurance and lock in a lower payment.

Verify your new rate (Nov 27th, 2020)