How to Avoid or Remove Mortgage Insurance
Mortgage insurance can add extra costs to your monthly mortgage payment, but the good news is that it’s possible to avoid or remove it in the right circumstances. Whether you’re a first-time homebuyer or looking to refinance, understanding your options can save you money.
What is Mortgage Insurance?
Mortgage insurance protects the lender in case a borrower defaults on their loan. It is required for many loans where the borrower puts down less than 20%. There are three main types:
Private Mortgage Insurance (PMI): Required on conventional loans with less than 20% down.
Mortgage Insurance Premium (MIP): Required on FHA loans regardless of down payment size.
VA and USDA Mortgage Insurance Premiums: VA loans have a one-time funding fee, while USDA loans have an upfront guarantee fee and an annual fee, both serving a similar function to mortgage insurance.
How to Avoid Mortgage Insurance
If you’re planning to buy a home and want to avoid mortgage insurance, consider these strategies:
Make a 20% Down Payment – Putting at least 20% down eliminates PMI on conventional loans. Choose a VA or USDA Loan – These government-backed loans do not require mortgage insurance, though they have funding or guarantee fees. Look into Lender-Paid Mortgage Insurance (LPMI) – Some lenders offer higher interest rate options where they cover the PMI cost upfront. Consider a Piggyback Loan (80/10/10 Loan) – This involves taking out two loans: one for 80% of the home’s price, a second loan for 10%, and putting 10% down, avoiding PMI.
How to Remove Mortgage Insurance
Already have mortgage insurance? Here’s how you may be able to remove it and lower your monthly payment:
Automatic PMI Cancellation – Lenders must automatically cancel PMI when your loan balance reaches 78% of the home’s original value (based on your initial payments). Request PMI Removal at 80% LTV – You can request removal earlier once you reach 80% loan-to-value (LTV) through payments or home appreciation. Refinance into a New Loan – If your home has appreciated, refinancing into a new loan with at least 20% equity can eliminate PMI or MIP. FHA Loan? Switch to Conventional – If you have an FHA loan, refinancing into a conventional loan with 20% equity is the only way to remove MIP.
Final Thoughts
Mortgage insurance isn’t permanent, and with the right strategy, you can avoid or eliminate it, saving money over time. If you’re considering buying or refinancing, talk to a loan officer to explore your best options.
Thinking about refinancing or buying? Contact us today to discuss how to reduce or remove your mortgage insurance!