Did you buy a home with less than a 20% down payment? Then you probably are familiar with private mortgage insurance, or PMI (if you have an FHA loan, you know it by mortgage insurance premium or MIP). Mortgage insurance is usually required on loans with less than a 20% down payment.
It is necessary because lenders will not take on the risk of lending that much money with a low-down payment unless they are assured they will be reimbursed if you default. Mortgage insurance reimburses the lender if you stop making your mortgage payments. PMI is an annoying extra cost each month on top of your mortgage, and it is great to get rid of it if you can.
Below are ways to eliminate PMI or MIP that you can try.
PMI Removal Steps
To get rid of your monthly PMI payment, you are required to have at least 20% equity in your home with a conventional mortgage backed by Fannie Mae or Freddie Mac. You can write a letter to the mortgage lender when you have reached 20% equity and ask them to remove your mortgage insurance. This may be possible when you have paid down your mortgage balance to 80% of the original appraised value of the home.
Also, in these times of rising property values in 2018, it is possible that appreciation could cause you to reach 20% equity faster than just through paying your mortgage on time. You may want to order a new appraisal on the property if you think that your home value has gone up significantly. You can get an idea by looking at the sold prices in the past year for similar homes in your neighborhood. Also, if your property tax assessment went up substantially in the past year or two, you may have reached 20% equity faster than you thought.
When you write a letter to your conventional mortgage lender, you will need to ask them to remove the PMI payment because you believe you have reached 20% equity. You will need to provide proof that the home value supports your request, such as with a recent appraisal report. Or, you can refer to your original amortization schedule to show that you have paid down the mortgage so that you have 20% equity.
The mortgage lender generally will drop the PMI requirement when you reach 20% equity and make a written request. But do not assume they will do so automatically! Some lenders will drag their feet and hope you continue to make PMI payments after you reach 20% equity. However, recent federal law changes do require conventional lenders to drop your PMI requirement when your loan balance has reached 78%. To get the payment dropped, you will need to have made your mortgage payments on time for at least the past year.
MIP Removal Steps
Unfortunately, if you have an FHA lien that was underwritten after early June 2013, your mortgage insurance requirement is for the life of the loan, UNLESS you made at least a 10% down payment. In this case, you can have your mortgage insurance cancelled after 11 years. This is a recent change to FHA rules that was enacted because the emergency fund for FHA to tap in case of mortgage defaults had gotten below the legislatively mandated minimum amount, so the MIP requirement was made permanent for most borrowers.
If you think it sounds unfair to be paying mortgage insurance when you have 50% equity, we agree with you. Who is going to default on a mortgage when they have possibly hundreds of thousands of dollars of equity in their home? Virtually no one.
So, if you have an FHA mortgage and have above 20% equity, it is highly recommended that you refinance your FHA loan and move into a conventional loan. But you need to have a good enough credit score to do so. Plus, if you have an FHA loan that was approved in 2016 or 2017 for example, you are probably enjoying a much lower interest rate than you can get in 2018 or beyond. You will need to run the numbers to determine if you can save more money by cancelling PMI and moving into a possibly higher interest rate with a refinance into a conventional loan.
Whether you have a conventional or FHA-insured loan, you can speed up your ability to cancel mortgage insurance by prepaying on your loan; even an extra $50 per month will mean a serious drop in your balance over the years. Also, consider remodeling, which can add substantial value to your home. Then ask your lender to recalculate your loan to value to see if you have gotten to the magic 20% equity mark.