Mortgage insurance is a fee you must pay if you have a government-backed loan (except the VA loan) or if you put less than 20% down on your conventional loan purchase. In some cases, mortgage insurance can add as much as a couple hundred dollars to your mortgage payment.
Mortgage insurance is strictly coverage for the lender. If you were to default on your loan, the lender would have insurance coverage to get some of the money back that they lost on your defaulted loan.
In some cases, you don’t have to pay mortgage insurance forever. Keep reading to see how you may be able to eliminate it.
Conventional Loans and Mortgage Insurance
If you put less than 20% down and you used conventional financing, you must pay Private MortgageInsurance. The amount you’ll pay depends on your LTV and credit score. You pay this insurance until you owe less than 80% of the home’s value. This can happen in a couple of ways:
- You pay the principal down according to your amortization schedule and hit 80%
- Your home appreciates enough that you owe less than 80%
If you want to eliminate the PMI on your loan, you must request it in writing. You must also provide proof of the reason. For example, if your home appreciated, you can supply evidence of the comparable sales in your area.
If you don’t request the elimination of the PMI, by law, your lender must eliminate your Private Mortgage Insurance when you owe 78% or less of the home’s value.
FHA and USDA Loans With Mortgage Insurance
FHA and USDA loans are both government-backed loans. In order to provide the guaranty that they provide, you must pay mortgage insurance. Unlike conventional loans, you cannot cancel the mortgage insurance on the FHA or USDA loan. You will pay the insurance for the life of the loan.
Also unlike conventional loans, each borrower pays the same amount of mortgage insurance. On FHA loans, borrowers pay 0.85% of their average principal balance each year. The lender then breaks that premium up over 12 months, charging you 1/12th each month. On USDA loans, borrowers pay 0.35% of the average principal balance each year. Like FHA loans, you pay 1/12th of that amount each month.
In addition to the annual mortgage insurance charged, both FHA and USDA loans also charge an upfront mortgage insurance fee. The FHA charges 1.75% as an upfront mortgage insurance fee and the USDA charges 1.0%. Each of these is a percentage of the loan amount and the fee is collected at the closing.
Like we stated above, you pay the insurance for the life of the loan. This means even when you owe less than 80% of the home’s value, you still pay mortgage insurance.
Getting Rid of Mortgage Insurance on FHA or USDA Loans
The only way to eliminate mortgage insurance on FHA or USDA loans is to refinance the loan. You’d have to refinance into a conventional loan with an LTV of 80% or less in order to avoid PMI. Because conventional loans have stricter requirements than FHA or USDA loans, you’ll need to make sure you qualify.
Conventional loans require:
- 680 credit score
- 28% housing ratio
- 36% total debt ratio
- Stable income/employment
- No recent bankruptcies or foreclosures
If you took the FHA or USDA loan because you didn’t meet one of these requirements, you’ll have to work to improve your situation so that you do qualify. Once you pay off your USDA or FHA loan, you’ll eliminate the mortgage insurance once and for all.
Paying mortgage insurance doesn’t have to be a bad thing as it does help you get the loan that you need. But after a while, you’ll want to eliminate it from your payment. If you can request elimination with a conventional loan, that is the easiest route, otherwise, you may have to refinance and pay closing costs to get a new loan.