Mortgage insurance adds quite a bit to your mortgage payment. Depending on your loan type, it could cost you more than $100 extra per month. Since the insurance doesn’t benefit you, chances are you want to know how to get rid of it as quickly as you can.
Keep reading to learn how long you may have to pay mortgage insurance.
FHA and USDA loans both charge annual mortgage insurance. Your lender breaks the annual premium down into monthly payments to make it more affordable.
Unfortunately, mortgage insurance on government loans lasts for the loan’s term. In other words, you pay mortgage insurance as long as you have the loan. Currently, the FHA charges 0.85% of the outstanding loan amount and the USDA charges 0.35% of the loan amount. The actual dollar amount that you pay will decrease as you pay the balance down as lenders figure the insurance premium annually.
The only way to eliminate mortgage insurance on a government loan though, is to refinance into a non-government loan. This only works to your benefit if you owe less than 80% of the home’s value.
Conventional loans are not government loans. They use Fannie Mae or Freddie Mac guidelines, which are stricter than government loans. However, conventional loans have lower mortgage insurance premiums.
Unlike government loans, conventional loans only require mortgage insurance if you make less than a 20% down payment. If you do, you only pay mortgage insurance until you owe less than 80% of the Home’s value. Once you owe 80% or less, you can request that the lender cancel the insurance.
Lenders will only cancel the insurance you:
- Are current on your payments
- The home did not depreciate since you bought it
- You owe less than 80% of the home’s original value
If you don’t cancel the PMI before you owe less than 78% of the home’s original value, the lender must cancel the insurance by law.
Refinancing Your Mortgage and Mortgage Insurance
If you refinance your loan, you still pay mortgage insurance in many cases. For example, if you take out an FHA or USDA loan, you pay insurance for the life of the loan. If you refinance out of a government loan and into a conventional loan, you only pay PMI until you owe less than 80% of the home’s value.
Upfront Mortgage Insurance
If you take out government loans, you should know that you’ll also pay upfront mortgage insurance. This insurance is a one-time fee, but you pay it in cash at the closing.
The USDA charges 0.35% of the loan amount. You can pay the full amount at the closing or wrap it into your loan amount. Even though the USDA doesn’t require a down payment, you can borrow more than 100% of the home’s value.
The FHA charges 1.75% of the loan amount upfront. You pay this insurance at the closing too. You can only wrap the fee into your loan amount if you have room in the home’s value. The FHA does allow you to receive gift funds to cover the cost too. The gift can come from a relative or your employer. Your seller can also contribute to this fee.
The FHA Upfront MIP Refund
If you have an FHA loan and want to refinance, you may get a refund of some of the upfront mortgage insurance that you paid. If you refinance within the first three years that you have the FHA loan, you can receive a prorated amount of your mortgage insurance back. You are eligible for a refund after you have had the mortgage for 6 months and up until three years. The earlier that you refinance your mortgage, the more money you’ll receive as a refund.
The FHA upfront MIP refund goes toward your new FHA upfront insurance. This decreases the amount you would owe if you refinance.
Mortgage insurance doesn’t have to be forever, but you may have to take some steps to eliminate it. If you have a government loan, you must refinance. If you have a conventional loan, you must wait until you owe less than 80% of the home’s value or you can refinance. Mortgage insurance helps you get the mortgage you need with a low down payment. Use it to your advantage and then use the tools to get rid of it once you are ready.