If you pay mortgage insurance on your loan, you probably wonder when you will be able to stop. That’s a valid concern. Unfortunately, it’s not a one-size-fits-all answer. It depends on the type of loan and the value of your home.
There are several types of mortgage insurance you can pay:
- Conventional loans have Private Mortgage Insurance if borrowers put down less than 20% on the home.
- FHA loans have annual mortgage insurance which every FHA loan holder must pay.
- USDA loans have annual mortgage insurance which every USDA loan holder must pay.
The End of Mortgage Insurance
So now the big question, just when can you stop paying these different types of mortgage insurance?
- Conventional loans – By law, the lender must cancel your PMI once you owe 78% or less of the value of the home. You’ll know the exact date this would happen by looking at your closing documents. The amortization chart should show you when you’d reach this balance. This, of course, assumes you make all of your required payments on time.
- FHA and USDA loans – You pay mortgage insurance for the life of the loan. It’s not based on your loan to value ratio. Instead, it’s a way to keep these government entities funded and able to continue to guarantee loans like yours for the bank.
Getting Rid of Mortgage Insurance
Luckily, you have options, no matter what type of loan you have to get rid of the mortgage insurance.
- Conventional loans – If your home appreciated, you can pay for a new appraisal and provide it to your lender with a request to cancel your PMI. The lender can then decide if the value is legitimate and if PMI should be canceled. They base their decision on your payment history as well. Some lenders require at least 2 years of payments before they will consider it. Most lenders also require you to have a timely mortgage payment history (no late payments) or they won’t cancel the insurance.
- FHA and VA loans – The only way to cancel insurance on either of these loans is to refinance out of the programs. Their insurance programs are in place for the life of the loan. Both the USDA and FHA are on the hook for your loan until it’s paid off. Granted, your risk of default decreases as you own more equity in the home, but the risk is still there. If you want out of the insurance, it’s best if you wait until you owe less than 80% of the home’s value and then take out a conventional loan.
Is it Worth Getting Rid of Mortgage Insurance?
You might think that getting out of your loan with mortgage insurance is the best thing you can do. In some cases, it may be; but it’s not always the case.
Refinancing costs money. If your only choice is to refinance out of your current loan into a conventional loan without PMI, consider the costs. How much are you willing to pay out of pocket to get rid of the insurance? Better yet, how long are you staying in the home? Will you even be there long enough to enjoy the savings?
Let’s take a look at how this works.
You want to refinance to get out of paying the $100 PMI each month. The refinance will cost you $5,000. That means you won’t pay back the closing costs with your savings for 50 months. So now think, will you live in the home much more than 4 years to make it worth it? If for example, you think you’ll move in 6 years, it might not be worth it. If, however, this is your ‘forever’ home, you may want to consider it as you’ll save a lot more over the remaining term.
Paying mortgage insurance doesn’t have to last forever, but it does require you to make a valid decision. Don’t focus on the extra money you pay each month – look at the big picture. If refinancing makes sense because you’ll recoup your fees, then do it. Of course, the best case scenario is to keep your current loan and have the bank cancel the PMI. That only works if your home appreciated though. If not, know that you have options.Click to See the Latest Mortgage Rates»