Can I Get Rid of Mortgage Insurance?

Mortgage insurance protects lenders from financial loss if a borrower fails to make mortgage payments. This coverage allows individuals to purchase a home with a smaller down payment than typically required. While it facilitates homeownership, many homeowners seek to eliminate this ongoing expense from their monthly mortgage payments. This article explains the various pathways available for removing mortgage insurance.

Understanding Mortgage Insurance Types

Two primary types of mortgage insurance exist, each linked to specific loan products. Private Mortgage Insurance (PMI) applies to conventional loans when a borrower makes a down payment of less than 20% of the home’s purchase price. This insurance compensates the lender if the borrower defaults. Federal Housing Administration (FHA) loans require Mortgage Insurance Premium (MIP), which is mandatory for all FHA loans regardless of the down payment. Both PMI and MIP protect the lender, but their requirements and cancellation rules differ.

Automatic Termination of Mortgage Insurance

The Homeowners Protection Act of 1998 (HPA) provides guidelines for automatic termination of Private Mortgage Insurance (PMI) on conventional loans. This law mandates automatic PMI cancellation when the loan’s principal balance is scheduled to reach 78% of the home’s original value. Original value is the lesser of the property’s sale price or its appraised value at mortgage creation. Termination also occurs at the midpoint of the loan’s amortization period, even if the 78% loan-to-value (LTV) ratio has not been met. The borrower must be current on mortgage payments for automatic termination.

Requesting Mortgage Insurance Cancellation for Conventional Loans

Homeowners with conventional loans can proactively request the cancellation of Private Mortgage Insurance (PMI) before its automatic termination. To initiate this process, the borrower’s loan balance must reach 80% of the property’s original value. Borrowers can accelerate this by making additional payments to reduce their principal balance faster.

Before submitting a request, a borrower must have a good payment history, typically no late payments in the past 12 to 24 months. The borrower also needs to certify that there are no junior liens, such as a second mortgage, on the property. The servicer may require an appraisal to confirm the property’s current value has not declined below its original value. Some lenders may allow cancellation based on a current, higher appraised value, provided the new loan-to-value (LTV) is 80% or less.

Once these conditions are met, the borrower must submit a written request to their loan servicer. The servicer will review the request and may order an appraisal, often at the borrower’s expense, to verify the current loan-to-value. If all criteria are satisfied, the servicer is obligated to cancel the PMI. The servicer will then notify the borrower of their decision, removing the PMI charge from future mortgage statements.

Removing FHA Mortgage Insurance Premiums

Rules for canceling Mortgage Insurance Premiums (MIP) on FHA loans differ from those for conventional loans. For FHA loans originated on or after June 3, 2013, MIP duration depends on the initial loan-to-value (LTV) ratio. If the original LTV was greater than 90%, MIP is required for the entire loan term.

For FHA loans originated on or after June 3, 2013, with an original LTV of 90% or less (a down payment of 10% or more), MIP can be removed after 11 years. For FHA loans endorsed before June 3, 2013, MIP could be canceled once the loan balance reached 78% LTV or after 11 years, depending on the original LTV. Many FHA borrowers find the most common way to eliminate MIP is by refinancing their FHA loan into a conventional mortgage.

Using Refinancing to Eliminate Mortgage Insurance

Refinancing offers a path to eliminate mortgage insurance for both conventional and FHA loan holders. This process involves securing a new mortgage to pay off the existing one. If the new loan’s loan-to-value (LTV) ratio is 80% or less, mortgage insurance may not be required on the new loan. This can be advantageous if property values have appreciated significantly, increasing the homeowner’s equity.

Homeowners should consider the costs associated with refinancing, such as closing costs, appraisal fees, and potential interest rate changes. Closing costs can range from 2% to 5% of the new loan amount. An analysis is needed to determine if the savings from eliminating mortgage insurance outweigh these upfront expenses and any adjustments to the interest rate or loan term. Refinancing can be a strategy to reduce monthly housing expenses, but it requires evaluating the financial implications.