Mortgage insurance is a common expense that many homeowners face, especially when they buy a house with a down payment of less than 20% of the purchase price.
Understanding how to remove mortgage insurance can really help in lowering your overall mortgage payment.
Let’s take a look at how to remove this financial hurdle and ultimately save money in the long run.
Understand the Types of Mortgage Insurance
Before diving into the removal process, it’s crucial to comprehend the two main types of mortgage insurance: Private Mortgage Insurance (PMI) for conventional loans and Mortgage Insurance Premium (MIP) for FHA loans.
Both serve the same purpose: to protect the lender in case the borrower defaults on the loan. PMI can be removed under certain circumstances, while MIP remains for the life of the loan for FHA borrowers.
Achieve 20% Equity
The key to removing PMI on conventional loans is reaching 20% equity in your home. Equity is the percentage of your home’s value that you own outright.
You can accomplish this in several ways, such as making extra payments towards your principal balance, making home improvements that increase its value, or waiting for your home to appreciate naturally over time.
Tracking your loan balance and property value will help you gauge when you’ve reached the 20% threshold.
Request PMI Cancellation
Once you believe you’ve achieved 20% equity, contact your lender to request the removal of PMI. They may require an appraisal to verify your home’s current value.
If the appraisal confirms your equity position, your lender should terminate the PMI premiums.
It’s essential to stay diligent and follow up to ensure this happens, as some lenders may not automatically remove PMI.
Refinance Your Loan
Another way to remove mortgage insurance is by refinancing your loan…and this is how you remove MIP from FHA loans.
If market interest rates are lower than when you initially purchased your home, refinancing could not only save you money on your monthly payments but also allow you to secure a loan without mortgage insurance if your equity position has improved.
This is the option most used by homeowners.
Understanding how to remove mortgage insurance is a crucial financial piece that can help you save money in the long run when you become a homeowner.
Achieving 20% equity and requesting PMI cancellation or refinancing your loan are two effective strategies to eliminate this extra expense.
Please do reach out to me today to discuss your current situation, as I’d be more than happy to discuss your options!