The Great Escape: How to Get Rid of Your Mortgage Insurance
If you are a homeowner and put less than 20 percent down, you are probably paying some type of mortgage insurance. Mortgage insurance is included with most loans with exception to VA loans. Depending on the type of loan program used for financing you may know it by different terms. If you have a conventional mortgage you pay private mortgage insurance, or PMI. If you have an FHA loan, you pay a mortgage insurance premium or MIP. They have the same purpose and create the same challenges for your household budget. The about Video: How to Remove Mortgage Insurance will provide you with a more detailed explanation.
Every time you receive your mortgage payment you see a line item that reads mortgage insurance. Though you pay for the insurance, you are not the benefactor. Mortgage insurance is there to protect your lender in the event that you default on your loan. Until the start of 2014, mortgage insurance was tax deductible for homeowners due to the Tax Relief and Healthcare Act of 2006. Unfortunately Congress has not extended this benefit into 2014.
The question is what can be done if you don’t want to waste the thousands of dollars paying mortgage insurance for almost a decade. There are definitely options to speed up this process and add money to your household budget when you learn How to Remove Mortgage Insurance
Private Mortgage Insurance:
You are obligated to pay PMI until you have 20 percent equity in you property or a loan to value of 80%. If you were to purchase a 400,000 home, you would be paying PMI until your loan balance reaches $320,000. Once you reach this point, you can contact your lender and request that your PMI be removed. At this point your lender would want to verify
1. A good payment history on the home
2. The home’s value has not declined below the original value
3. There are no subordinate liens against the home
As long as you meet those three standards, your request should be considered. The lender ultimately decides if they are going to approve your request. It is important you are aware of when you reach 20% equity because your lender does not have to remove the PMI automatically until you have reached 78% loan to value.
With a conventional mortgage there are a few options you can pursue to speed up the process of removing your PMI. The most basic was is to just pay your mortgage payments on time and let it happen naturally. Understand this process takes a lot longer than you may think. Many homeowners believe PMI will terminate within 5 years. With most of your mortgage payment going toward interest initially, it is going to be closer to 10 years. Take a look at the amortization schedule in exhibit 1.1.
The most popular way to remove mortgage insurance is to refinance once the value of the property increases to the level of needed equity. A $380,000 home with an appraised value of $475,000 would not require PMI. If you choose to pursue this option, make sure you evaluate the savings and the costs of refinancing.
All other options for removing PMI involve accumulating more equity in the home. You could add value to the home through upgrades and additions. You could make an extra payment toward principal every month. An extra $200 per month could shorten your loan payoff by 5 years. You could also ask your lender to have the home reappraised. However, this is only an option after a 2-year payment history on the mortgage.
Mortgage Insurance Premium:
If you have FHA financing you pay an annual mortgage insurance premium. This is usually a higher payment than PMI. It is based on a standard rate outlined in FHA guidelines. Options to remove your MIP are much more limited, than with PMI.
If you purchased your home before April 2013 you can still get rid of your MIP by paying down your mortgage faster. However with FHA, you are required to pay mortgage insurance for at least 5 years before you can request removal. Having the home reappraised is not an option to remove MIP. With an FHA loan, the value associated to the property will always be the value of the property at the time of purchase.
If you funded your FHA Loan after April 2013 your mortgage insurance will be for the life of the loan. That means that no matter how much equity you gain, you will continue to make payments on the mortgage insurance. The only option for these homeowners is to refinance into a conventional mortgage.
Regardless of the type of mortgage insurance you are paying, you may be wasting hundreds of dollars every month right now. Review your mortgage statement today and plug your information into an amortization schedule to see when your mortgage insurance will terminate. If you don’t like the answer you get, be proactive and start looking at your options to remove mortgage insurance. It may be the best decision you’ve made since you became a homeowner.