Refinance your home and stop paying mortgage insurance
If you bought your home with a low down payment, you are probably paying private mortgage insurance (PMI). And if you have an FHA loan, you may be paying a mortgage insurance premium (MIP).
Either way, there is a good chance that you want to get rid of your mortgage insurance.
One way to do this could be with a mortgage refinance.
A refinance can restore your loan and eliminate PMI or MIP if you have accumulated enough capital in the home. Doing so can save you a lot of money in the short and long term.
Refinancing does not only affect mortgage insurance either. Refinancing could now seriously reduce your interest payments thanks to historically low rates.
Of course, refinancing can also be expensive and complicated. Explore your options, compare rates and closing costs, and choose the most effective method for you.
Compare refinancing interest rates. Start here (October 9, 2019)
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The refinancing strategy
PMI and MIP are generally required for a certain period of time, either until it accumulates enough capital in the home or exceeds a certain period of time.
As long as you meet these criteria, mortgage insurance can sometimes disappear automatically. (More on that below.)
But for homeowners who want to get rid of mortgage insurance faster, there could be another way: with a mortgage refinance.
Related: Mortgage basics: what is a mortgage refinance?
"After enough capital has accumulated on your property, refinancing an FHA or conventional loan to a new conventional loan would eliminate MIP or PMI payments," says Wendy Stockwell, vice president of operations support and product development for Embrace Home Loans
"This is possible as long as your LTV is 80% or less."
Stockwell notes that it is also possible to refinance in a different program, one that does not require MIP or PMI, even with an LTV greater than 80%.
These are just some examples of mortgage loan programs that do not require mortgage insurance *:
Neighborhood Assistance Corporation of America (NACA) The best mortgage in America
Bank of America Loan Solution® Affordable Mortgage
Flagstar Bank Professional mortgage
CitiMortgage HomeRun Mortgage
* Programs in force at the time of publication of this article. Loan programs are subject to change.
"The interest rate (on non-conforming loan products) may be slightly higher than on a conventional loan," says Stockwell. "But the elimination of mortgage insurance payments ends up reducing your total monthly mortgage payment."
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How much you can save a refinance
A PMI refinancing or an FHA refinancing can generate huge savings, depending on your current rate and balance.
"Let's say the current value of your home is $ 250,000," says Mike Scott, principal creator of mortgage loans at Independent Bank. “He has an FHA loan with a current balance of $ 195,000 and a rate of 4.25%. And you have 27 years left for the loan. "
Scott notes that the capital and monthly interest he pays for this loan are just over $ 1,000. "But the MIP you must pay adds another $ 140 a month."
Decides to refinance a new conventional loan in the amount of $ 200,000. Its rate is 3.75% for 30 years. Assume that the new loan includes closing costs and other prepaid items in the loan.
"You are starting over with another 30-year loan. But now your monthly payment of principal and interest is $ 930 per month, without the need for IPM. That is a saving of (more than $ 200) per month, at least initially "says Scott.
Original mortgage (FHA)
Refinanced mortgage (conventional)
$ 138 / month
* The monthly payments shown here include capital and interest only, and are for sample purposes. Your own payments will vary.
What to consider before refinancing to get rid of mortgage insurance
That does not mean that a PMI refinancing or an FHA refinancing will always be the right decision.
"Refinancing to eliminate the PMI will require payment of closing costs, which may include host fees," says Keith Baker, coordinator of the mortgage banking program and faculty at North Lake College.
"You should make sure that refinancing doesn't cost you more than you save."
Also keep in mind that refinancing a new FHA loan can add upfront costs that could exceed your savings.
“With an FHA loan, you pay your MIP in advance. When you refinance an FHA loan after 3 years, you will have to pay that MIP in advance again, ”warns real estate agent and real estate attorney Bruce Ailion.
Ailion continues: “You should calculate the savings versus the costs to see how long it will take for the savings to cover the cost of the new loan. If it is longer than it will likely remain at home, it is probably not a smart decision to refinance. "
Another warning? If you still owe more than 80% of the value of your current home, it may not be as beneficial to refinance.
"Also, if your credit score is less than 700, keep in mind that conventional loans through Fannie Mae and Freddie Mac charge loan price adjusters," adds Scott. "This may affect the new interest rate compared to what you are currently paying."
Background on private mortgage insurance (PMI)
If your down payment was less than 20%, you are probably paying for private mortgage insurance (PMI).
Stockwell says that borrowers are required to pay PMI on conventional loans "when more than 80% of housing capital is being lent."
"The PMI is paid monthly or by paying a full premium at closing," he explains.
But there is 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.
"Protect the lenders in case you do not potentially meet your loan," says Baker. That means that any potential payment would go to your mortgage lender.
In general, the PMI will decrease automatically, either when your loan-to-value ratio reaches 78% or when you reach the middle of your loan term.
To cancel the PMI, "you must normally reach the 80% mark in terms of value loan (LTV)," says Scott. "The PMI will be automatically reduced once your LTV reaches 78%." He adds that the original value of your home is generally considered.
Alternatively, the PMI can be canceled at your request once the net value of your home reaches 20% of the purchase price or appraisal value.
“Or, the PMI will be canceled once it reaches the midpoint of its amortization. Then, for a 30-year loan, in the middle of 15 years, the PMI should be automatically canceled, ”says Baker.
Background on the mortgage insurance premium (MIP)
Unlike private mortgage insurance, the mortgage insurance premium (MIP) is charged exclusively for FHA loans.
“MIP payments are divided. First, pay an initial initial premium at closing. The remaining premium is amortized monthly during the life of your loan, "says Stockwell.
MIP must be paid for the full term of the FHA mortgage loan with a loan-to-value ratio greater than 90%. With an LTV of 70-90%, it must be paid for 11 years.
Keep in mind that in FHA loans with LTV ratios between 70% and 90%, MIP is required to be paid for 11 years.
"But with LTV at 90.01% or more, the MIP must be paid for the full term of the loan. So, if you have an LTV of, say 91%, and have a 30-year FHA loan, you will pay MIP for 360 payments," says Stockwell. This is true unless you refinance or pay your mortgage early.
If you have an FHA loan and accumulate more than 30% of capital in your home before the required 11-year MIP period expires, a refinance could help you get rid of insurance costs early.
Your next steps to cancel PMI or MIP
Refinancing can reduce your mortgage costs by a significant margin.
In addition to getting rid of mortgage insurance, you could potentially refinance at a much lower rate and save interest during the term of the loan.
So, is refinancing the right decision for you? We recommend comparing the rates and closing costs of at least three lenders to find out. Your savings should be large enough to offset the initial costs of a refinance.
Compare the rates of the main lenders. Start here (October 9, 2019)