Mortgage insurance, while a useful tool for homeowners to get into a home sooner, often becomes an unnecessary cost as you build equity in your home. Whether it’s Private Mortgage Insurance (PMI) for conventional loans or Mortgage Insurance Premiums (MIP) for FHA loans, many homeowners look forward to the day they can cancel this extra expense. Here’s a comprehensive guide on how to cancel your mortgage insurance, freeing up money in your monthly budget.

Understand What You Have: PMI vs. MIP

Private Mortgage Insurance (PMI)

• PMI is typically required when you have a conventional loan and make a down payment of less than 20% of the home’s purchase price. PMI protects the lender in case you default on your loan.

Mortgage Insurance Premium (MIP)

• MIP is required for all FHA loans, regardless of your down payment. There are two types of MIP: upfront MIP, paid at closing, and annual MIP, paid monthly.

Cancelling PMI

• Automatic Termination
  • Under the Homeowners Protection Act, your lender must automatically terminate PMI on the date your principal balance is scheduled to reach 78% of the original value of your home, as long as you are current on your payments.
• Requesting Early Cancellation
  • You can request to cancel PMI when your mortgage balance reaches 80% of the original value of your home. Here’s how:
    • Check Your Balance: Review your mortgage statement to see your current balance. Use your original purchase price as the benchmark for calculating 80%.
    • Understand Your Lender’s Requirements: Lenders may have specific requirements for PMI cancellation, such as a good payment history and no liens on the property
    • Get a Home Appraisal: If you believe your home has appreciated in value, you may reach the equity threshold sooner. However, you’ll likely need a professional appraisal to prove this to your lender, which you will have to pay for.
    • Submit a Request in Writing: Send a written request to your lender asking for PMI cancellation. Include your account number and any evidence of your home’s value, if applicable.
    • Continue Payments: Continue making your regular mortgage payments while your request is processed.

Cancelling MIP on FHA Loans

Cancelling MIP is more challenging and depends on when your loan was originated:

• Loans Originated Before June 3, 2013: You can request to cancel MIP when your loan-to-value ratio reaches 78%.
• Loans Originated After June 3, 2013: For loans with an initial down payment of less than 10%, MIP cannot be cancelled and is required for the life of the loan. For initial down payments of 10% or more, MIP is required for 11 years.

Unfortunately, the only way to eliminate MIP on newer FHA loans with a down payment of less than 10% is by refinancing into a conventional loan once you’ve reached 20% equity.

Refinancing as an Alternative

If you’re not eligible to cancel your mortgage insurance through the methods mentioned above, refinancing could be a viable option. Refinancing your mortgage to a conventional loan might eliminate the need for PMI if you have at least 20% equity in your home. However, consider the closing costs associated with refinancing to ensure it’s a financially beneficial move.

Conclusion

Cancelling mortgage insurance can potentially save you hundreds to thousands of dollars annually, but it requires an understanding of your loan type, equity, and the rules that apply. By following the steps outlined above, you can navigate the process more smoothly and work towards removing this extra monthly expense. As always, consult with your lender or a financial advisor to understand your specific situation and the best course of action for your financial future.