Learn how mortgage insurance works and the options you have.
December 21, 2016
If you bought a home with a down payment that is less than 20% of the purchase price, or if you refinanced with less than 20% equity, your lender will require you to purchase mortgage insurance.
It’s important to note that not all loan programs will offer the same terms. That’s why it’s smart to contact your agent when looking to find the right loan for you. A savvy agent can help you navigate the often confusing world of finance as they work with a wide range of professionals who can help.
Is There Only One Kind of Mortgage Insurance?
All mortgage insurance serves the same purpose-to protect your lender should you default on your mortgage. However, different loan types use different terminology for mortgage insurance.
- FHA – MIP (mortgage insurance premium)
- VA – no mortgage insurance required
- Conventional – PMI (private mortgage insurance)
- USDA – MI (mortgage insurance)
How Much Is It?
Your premium is determined by the lender and will depend on two things: your loan to value ratio and your credit score. So for example, someone with a credit score below 700 who puts down only 5%, will pay a higher premium than someone with a credit score of 760 who puts down 15%.
Conventional loans: 0.20% to 1.50%
FHA loans : Upfront premium often added to loan amount has two payments. 1.75% of loan amount + annual premium (paid monthly) 0.7% to 1.3%
USDA loans : Upfront premium of 2.75%, based on loan size, added to loan balance + .50% annual fee based on remaining principal balance
How Do I Pay It?
There are several options you have to pay mortgage insurance.
Monthly. This is the most common type of mortgage insurance payment. The premium will be calculated into your monthly payment. The lender will then pay the premium annually on your behalf. So for example, let’s say you’re purchasing a $200,000 home and have put down 10%. The PMI at a 1% rate would be $1,800 per year, $150 monthly.
One-time payment. If you prefer to keep your monthly payments as low as you can a single payment might be the way to go. Typically, this kind of premium will range from 1% to 2% of the loan amount, so taking the same example above, you would be paying anywhere from $1,800 to $3,600 at the time of closing to cover your mortgage insurance premiums. The lender might also let you roll the premium into your loan so that it will be financed over the life of the loan rather than annually.
Lender paid premium. Some lenders will pay the mortgage insurance if you agree to pay a higher interest rate. This keeps your monthly payments lower than if you had to pay a monthly PMI premium, however keep in mind that you will be paying this higher interest rate until you either refinance or pay off the loan.
How Do I Get Rid of PMI?
For conventional loans you must have at least 20% equity in the home. When you have paid the mortgage balance down to 80% of the home’s original appraised value, you can ask your lender to drop the mortgage insurance.
When your loan balance drops to 78% the mortgage servicer is required to eliminate the mortgage insurance.
FHA loans, however are dealt with differently.
For FHA loans with MIP (mortgage insurance premium) that originated before June, 2013, mortgage insurance cancels when the loan to value gets to 78% and 5 years have passed since the loan was created. FHA loans taken out after this date will pay mortgage insurance for as long as the loan is in place.
So as you can see, in some cases the best way to get out of paying mortgage insurance on an FHA loan is to simply refinance. USDA loans also have mortgage insurance for the life of the loan, so to get rid of mortgage insurance you would need to refinance.
Can I Get Out of PMI Early?
Get a new appraisal. Some lenders will consider a new appraisal instead of the one acquired at the time of purchase. If they agree with the appraisal – which typically costs from $300 to $500 – they might agree that you meet the 20% equity threshold and drop the PMI.
Make loan prepayments. Paying something as small as an extra $50 per month can drop your loan balance dramatically. There are a number of repayment calculators available online to help you find the best way to pay your loan down faster.
Remodel. Increase your home’s value by making improvements to your home. Not every change to your home will increase its value. Consult an agent about those changes you can make to your home before you get started.
How Do I Calculate My Equity?
Simply divide your current loan balance (how much you still owe) by the original appraised value (typically the same as the purchase price).
For example, let’s say you purchased a home for $250,000 dollars and have paid the mortgage down until it has a balance of $190,000. Your PMI should have been canceled by now, because you’re at less than 78% of original value.
Are There Any Other Requirements to Cancel?
Yes. You should request PMI cancellation in writing. You must be current on your payments and have a good payment history. You may be required to prove there are no other liens against the property. You might be required to get an appraisal to prove that the loan isn’t more than 80% of the home’s current value.
What if my Lender Doesn’t Agree to Drop It?
If your home has increased enough in value, you can refinance without paying mortgage insurance. Calculate the costs of refinancing to be sure it doesn’t cost more than if you were to simply keep paying the mortgage insurance.