Mortgage insurance can add quite a bit of money to a borrower’s monthly payment. How you get rid of mortgage insurance depends on what type of loan you have. If you got your FHA loan after June 1, 2013, you likely pay a monthly mortgage insurance premium (MIP). If you put more than 10% down, you’ll have to pay MIP for the first 11 years, but if you put less than 10% down, MIP is required for the life of your loan.Getting Rid Of The FHA Mortgage Insurance Premium
If you’re stuck with MIP, refinancing into a conventional loan may be your best bet – but it all comes down to how much equity you have. If you have less than 20% equity in your home, taking on a conventional loan may just mean swapping MIP for private mortgage insurance (PMI). But if you have 20% equity, you won’t be required to pay PMI on a conventional loan.
To determine how much equity you have, you’ll need to know how much your home is worth. When you refinance, your mortgage lender will require an appraisal of the home to determine the value. Your equity will be based on what your home is worth when you refinance – not what it was worth when you bought it. To find out how much equity you have, simply subtract your current loan balance (how much you owe) from your current home value.
Getting Rid Of Private Mortgage Insurance
If you didn’t put 20% down on your home when you bought it, you’re probably paying for private mortgage insurance (PMI) as part of your monthly payment. PMI protects your lender in case you default on your loan.
Getting rid of PMI doesn’t necessarily require a refinance. Once you hit 20% equity in your home, you can ask your lender to remove PMI. There are a few things to keep in mind about this:
- If you’ve hit 20% equity as a result of your home’s value increasing or making extra payments, your lender will probably require an appraisal.
- If you’ve hit 20% equity on your regular payment schedule (i.e., you haven’t made any extra payments), your lender won’t require any appraisal.
- Once you hit 22% equity according to your regular payment schedule, your lender must automatically cancel PMI from your loan.
If 20% equity is still out of reach, a refinance with lender-paid mortgage insurance (LPMI) might be a way to get rid of monthly PMI payments. With LPMI, you can either pay for PMI upfront in a lump sum or opt for a slightly higher interest rate. This allows you to save money since mortgage interest is tax-deductible, but PMI isn’t.
