How to get rid of PMI: Remove conventional PMI or FHA MIP
Remove your mortgage insurance premiums for good
PMI is a big cost for homeowners — often $100 to $300 per month. Fortunately, 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. Here’s how you can remove your PMI.
In this article (Skip to…)
How to remove PMI: Key takeaways
Can you get rid of PMI? The answer depends on your loan type and your current principal balance.
Remove conventional PMI:
- Conventional PMI goes away on its own when you have 22% home equity. You build equity as you pay down your mortgage and as your home’s value increases
- You can request PMI cancellation when you have 20% home equity. Contact your loan servicer to request PMI cancellation
Remove FHA MIP:
- FHA mortgage insurance (MIP) lasts the life of the loan unless you put down 10% or more
- To get rid of FHA mortgage insurance, you must refinance to a conventional loan
- You’ll need a 620 credit score and 20% equity to get rid of your FHA mortgage insurance premium
With home values rising nationwide, many homeowners who are still paying for mortgage insurance will now have enough equity to cancel or refinance out of their mortgage insurance payments.
“You may be able to do this with a new appraisal, but not all lenders will allow this. It usually needs to be based on the original loan terms and home value when you secured your loan. Otherwise, you need to refinance to get the new value considered,” notes Jon Meyer, The Mortgage Reports loan expert and licensed MLO.
If you meet the requirements to get rid of PMI, you could start saving on your home loan immediately.
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.
- 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
- 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%
- 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
- 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 premium (MIP) will not automatically fall off. MIP typically lasts for the life 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.
“After sufficient equity has built up on your property, refinancing… to a new conventional loan would eliminate MIP or PMI payments.”
–Wendy Stockwell, VP, Embrace Home Loans
One way to get rid of MIP 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.”
Ask your lender about non-PMI loan programs
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
*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.”
VA loans — mortgages authorized by the Department of Veterans Affairs — do not require ongoing mortgage insurance. And they offer competitive interest rates. If you’re a veteran or a current service member, the VA loan program offers a great way to save money.
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.
What to consider before refinancing out of mortgage insurance
While refinancing to remove PMI can be a smart move, it’s not always the right decision.
“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.
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 upfront. When you refinance an FHA loan after 3 years you will have to pay that MIP upfront again” cautions Realtor and real estate attorney Bruce Ailion.
“You need to make sure refinancing won’t cost you more than you save.”
–Keith Baker, Mortgage Banking Program Coordinator, North Lake College
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.”
Remove 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.
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.
Remove 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.
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.
Is PMI bad?
PMI annoys a lot of homeowners, and it’s easy to understand why: You’re paying for coverage that protects your lender. The same is true for the FHA’s MIP requirement.
But mortgage insurance coverage isn’t all bad. In fact, without it, you’d probably be paying a higher interest rate because your lender would take a bigger risk on your loan.
This is especially true for homeowners who made the minimum 3% down payment on a conventional loan or put only 3.5% down on their FHA loan.
Still, when you can stop making this extra payment — without erasing your savings in closing costs or a higher interest rate — you should do so.
PMI removal FAQ
If you’re still 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 percent down payment. If you already have a mortgage with PMI, you might be able to refinance into a no-PMI loan.
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 percent 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 percent equity. However, some loan servicers will re-evaluate PMI based only on the original appraisal. So contact your servicer directly to learn about your options.
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 percent), you can refinance your FHA loan into a conventional loan without PMI.
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 percent 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.
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. The one exception to this rule is for FHA streamline refinances. If a homeowner 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.
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 five 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.
On average, PMI costs 0.5 to 1.5 percent 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.
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.
Different lenders and 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 percent home equity — enough equity to cancel PMI on a conventional mortgage which will save money each month.
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.
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 percent. You can request PMI cancellation when the LTV falls to 80 percent.
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 percent. The owner of this house would need to pay the mortgage’s principal balance down to $160,000 to achieve a LTV of 80 percent which is low enough to request PMI cancellation on a conventional loan.
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 and save money for months or years to come. In addition to dropping mortgage insurance, you could potentially lower your rate and save on interest over the life of the loan.
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
Comments are closed.