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You have studied your mortgage payment, looking for ways to reduce that monthly number, and one thing keeps jumping out – mortgage insurance.
You knew you’d have to pay it when you put less than 20% down, but it’s been on that statement every single month for a couple years now. Surely you have paid enough, right?
After all, that mortgage insurance is there to protect the bank in case you defaulted and you have made every single payment on time. Your house has also increased in value, you purchased at the bottom of the market. So, just how can you dump your mortgage insurance once and for all?
The Truth About Eliminating Your Mortgage Insurance
Advanced warning: some of you are going to like what you hear and others are not.
You have to consider quite a few variables when you are looking to eliminate your mortgage insurance. The most important variables are the type of loan you have and your loan-to-value.
You may already know that mortgage insurance is based on loan-to-value for some loans. But did you know that loan-to-value is irrelevant for certain loan types taken out at specific times. Confused? Let’s break it down into two categories of mortgage loans: FHA and Conventional.
We’ll start with FHA.
How to Get Rid of FHA Mortgage Insurance
Stick with me here, this topic can get a little convoluted with all of the changes to FHA financing, specifically how to calculate the MI, over the past few years.
The first factor when looking to eliminate FHA MI is not loan-to-value; it is when your loan was originated and endorsed. For homeowners whose FHA mortgage pre-dates June 3, 2013, MIP goes away when certain conditions are met :
- 30-year loan term : Annual MIP is automatically canceled once the loan reaches 78% loan-to- value and annual MIP has been paid for at least 60 months.
- 15-year loan term : Annual MIP is automatically canceled once the loan reaches 78% loan-to- value. There is no requirement for MIP to be paid for at least 60 months.
You should also be aware that FHA calculates the loan-to-value based on the ORIGINAL purchase price, not a new appraisal. The latter is not allowed on FHA financing as a tool simply to reduce the mortgage insurance unless you refinance.
If your loan was endorsed after June 3rd, 2013, and you paid less than 10% downpayment, then you have mortgage insurance. Period. You have to refinance to get rid of the MI.
Let’s go back to refinancing as a method to eliminate your mortgage insurance for a minute. FHA offers a streamline refinance program that many FHA borrowers have taken advantage of in the past few years.
Endorsement date factors heavily into what kind of MI you’ll pay. If your current FHA loan was endorsed on, or before, May 31, 2009, you can refinance and be “grandfathered” in to your old mortgage insurance rates instead of being stuck with the significantly higher MI that FHA borrowers pay now.
For “grandfathered” borrowers, upfront mortgage insurance premiums drop from 1.75 percent to just 0.01%, or $10 per $100,000 borrowed. Additionally, annual MIP rates drop from a maximum of 1.35 percent to just 0.55%, lowering an FHA loan’s “effective” mortgage rate by a full percentage point. Premiums are the same across all 15-year and 30-year mortgages, regardless of LTV.
Every thing clear? If not, no worries, that’s why they pay us — to answer your questions!
How to Get Rid of Conventional Mortgage Insurance
You might think that eliminating conventional PMI is more straight-forward than FHA. To a certain extent you would be correct.
The primary consideration is loan-to-value for conventional (Fannie Mae and Freddie Mac) financing. Yet there is a time component to consider. The time component can differ based on who services your loan.
The general guidelines for getting rid of conventional mortgage insurance require you to wait at least two years regardless of loan-to-value. However, many servicers will provide ample grief and roadblocks even after the two year mark passes. Of course, if you aren’t at 78% loan-to-value or less time is not a factor.
Unlike FHA financing, you can technically – provide a new appraisal to show proof of equity and a loan-to-value at or below 78%. I say technically because you will get push-back from many loan servicers. Remember, mortgage insurance protects them in case you default so they are generally reluctant to void that protection. Tenacity, however, will often prevail and, if you are at less than 78%, you have a good shot of eliminating your MI.
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