How to Remove Mortgage Insurance
The ability to remove mortgage insurance is a topic that not many home owners understand.
Both Private Mortgage Insurance (PMI) and Mortgage Insurance Premium (MIP) accomplish the same thing, which is to allow home buyers and home owners the ability to borrow more than 80% of the value of the home.
PMI and MIP are insurance policies that the borrower is required to pay the premiums on, that protect the lender in the event of a mortgage default.
Is Mortgage Insurance a Bad Idea?
Mortgage insurance is an extremely useful, and beneficial tool for purchasing a new home with less than a 20% down payment. In cases where a buyer has less than a 5% down payment, and an FHA first mortgage was used, converting that FHA into a conventional mortgage with PMI as quickly as possible is usually the goal.
In June 2013, FHA Mortgage Insurance Premiums were made permanent for all loan terms of 15 years or greater.
FHA mortgages are considered by most homebuyers to be a necessary evil, and more accurately a transitional loan program until which time market conditions allow you to refinance out of it.
Mortgage insurance was made tax deductible in 2007, and expired in 2011. Then, on January 1st 2013, it was extended, and made retroactive to include 2012 and 2013.
During these years, mortgage insurance did not receive the bad publicity it seems to have in today’s market.
Either way you cut it, mortgage insurance is a great tool, and only a fraction of the cost when you compare it to your ability to earn equity, and take other tax deductions such as mortgage interest, and property taxes.
How to Remove PMI & MIP Without Refinancing
The loss of mortgage insurance as a tax deduction now has many borrowers looking dump PMI and MIP as soon as absolutely possible.
There are several ways to do this without refinancing your mortgage to remove mortgage insurance, and possibly losing a very low interest rate.
The first step to remove mortgage insurance is to be up to date with your monthly payments. Federal laws provide two ways for you to remove PMI: Canceling PMI or PMI Termination.
The following PMI cancellation guidelines are taken from the Consumer Finance Protection Bureau (CFPB), updated August 28th, 2014.
Request PMI cancellation
The Homeowners Protection Act gives you the right ask your lender cancel PMI when you have reached the date when the principal balance of your mortgage is scheduled to fall to 80 percent of the original value of your home.
This date should have been given to you in writing on a PMI disclosure form when you received your mortgage. If you can’t find the disclosure form, contact your lender.
You can also make this request earlier if you have made additional payments to reduce the principal balance of your mortgage to 80 percent of the original value of your home.
There are other important criteria you must meet if you want to remove mortgage insurance:
- Your request must be in writing.
- You need a good payment history, and be current on your payments.
- Your lender may require you to certify that there are no junior liens (such as a second mortgage) on your home.
- Your lender can also require you to provide evidence (for example, an appraisal) that the value of your property hasn’t declined below the value of the home when you first bought it. If the value of your home has decreased, you may not be able to remove mortgage insurance.
If you meet these requirements your servicer generally must cancel your PMI when you request it.
Automatic PMI Termination
Even if you don’t ask your lender to cancel PMI, your lender still must remove mortgage insurance on the date when your principal balance is scheduled to reach 78 percent of the original value of your home.
You also need to be current on your payments on the anticipated cancellation date. Otherwise, PMI will not be terminated until shortly after your payments are brought up to date.
It’s worth noting a termination request is different than a cancellation request. Your lender must terminate PMI even if the principal balance of your loan has not actually reached 78 percent of the original value of your home – for example, because the value of your home declined.
Final PMI Termination
There is one other important requirement that some homeowners need to be aware of: your lender must terminate PMI if you reach the midpoint of your loan’s amortization schedule before the 78 percent date.
The midpoint of your loan’s amortization schedule is halfway through the life of your loan. Most loans are 30-year loans, so the midpoint would occur after 15 years have passed.
Removing FHA Mortgage Insurance Premium (MIP)
If your loan is guaranteed by the Federal Housing Administration (FHA), the above PMI removal methods do not specifically apply in the same way.
If you received your FHA mortgage prior to June 3rd, 2013, then your FHA mortgage insurance will be automatically removed when your principal balance reaches 78% of your original loan, based off the original purchase price, as long as at least 5 years has passed since the origination of the loan.
Mortgages with an FHA case number assignment date on or after June 3, 2013 the FHA insurance can be terminated by the servicer or holder if the mortgage is paid in full before the maturity date.
Refinancing to Remove PMI or MIP
In the cases of both PMI and MIP, you must have paid down the principal balance of the original loan to remove the mortgage insurance premiums.
The only way to speed up this process is to refinance out of your current loan with PMI or MIP, and into a new loan, using the new appraised value of your home.
It is not uncommon for FHA borrowers to refinance into a Conventional mortgage once the equity hits 5%, or a loan to value of 95% of the new appraised value.
The real question of the effectiveness of this strategy really depends on the interest rate you currently have on your mortgage, the amount of time it will take to pay the principal balance to 78%, and what interest rates are today, or on the day you consider refinancing.