How To Get Rid of That Mortgage Insurance PMI!

August 13, 2011/Scott Sheldon

You can get rid of mortgage insurance PMI sooner than waiting the full 30 years on that loan!

Lots of people considering taking out a mortgage whether it be purchasing or refinancing, do not want to pay mortgage insurance. The reality is MI is due to economic factors beyond our control. Mortgage insurance is required on all FHA loans and on some conventional loans if there is less than 20% equity. In some cases mortgage insurance can be fully tax-deductible and you should check with your tax professional.

Let’s be clear about one thing: mortgage insurance does not benefit you in any way shape or form. Mortgage insurance only benefits the bank -end of story.

So now that we know that getting mortgage with mortgage insurance PMI is potentially inevitable, how do we get rid of it?

The mortgage lender you’ll be making your payments to must remove the mortgage insurance after you have amassed 22% equity in your property. If you have any non-FHA loan, and you are paying mortgage insurance on a monthly basis you should begin prepaying your principal so you can build that needed 22% equity. After you have 20% equity in your property you can request your lender remove the mortgage insurance. So 20% equity means that you have the ability to request the mortgage insurance be removed. At 22% equity the lender must remove the mortgage insurance but you need to remind them to do so.

Okay great so what about an FHA Loan? FHA Loans are insured by the federal government and unlike conventional loans, these loans have two forms of mortgage insurance. There is a UFMIP which is short for upfront mortgage insurance premium and there is a monthly mortgage insurance premium which is also paid to the bank every month. Presently, the upfront mortgage insurance premium is 1% of the loan amount and that is financed in the loan over the term. For example if it is a 30 year fixed rate mortgage the premium is added to the loan amount, then amortized over 360 months.

The monthly mortgage insurance can be removed after 60 months and 20% equity in the property on an FHA loan. You must meet both requirements for these loans. HUD discloses that it’s usually 120 months that mortgage insurance will typically be removed on FHA loans.

How To Get Rid of Mortgage Insurance PMI once and for all.

Most consumers want to get rid of mortgage insurance PMI because they don’t want the added monthly cost. So why not refinance? Put another way, if you have a mortgage with mortgage insurance consider refinancing because rates are favorable. You can take that money you saved monthly by refinancing and begin prepaying your principal balance which will not only save you thousands of dollars in interest, it will also help you build that needed equity for mortgage insurance removal.

Is mortgage insurance really that bad? Short answer no because obtaining a loan today with mortgage insurance is the cost of being able to get a great deal on a home purchase or a very competitive interest rate on a refinance with a high loan to value. Because mortgage insurance is ultimately removable you get the best of both worlds.

Mortgage Insurance loans remain the mechanism for which people are able to obtain mortgage financing in today’s credit environment without 20% equity. If you have questions about mortgage insurance or are thinking about taking out a mortgage loan that might have mortgage insurance built-in, give me a telephone call at 707-217-4000. We can work out the numbers and see what the best solution is.

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7 Comments

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  4. Dawn Fremo on September 12, 2011 at 12:12 pm

    Hi Scott,

    I read this blog with interest because this is exactly the reason that it has not been in our best interest to refinance. We were going to refinance our 30-year loan with B of A from a 5.5% rate to a 4.85% (before things went down even more.) When we got the paperwork it turned out our monthly payment would be higher, not lower, even with the reduced rate. Why? you know why….FHA has raised their PMI twice since last October, so our monthly PMI payment would have gone from $113 to $260 or so, which cancelled out our interest savings and then some. Of course, stupid B of A never mentioned this to us, and hoped we would just sign the papers for a refinance at a higher monthly payment so someone could make money off the refi. We would like to do a 15-year, both to pay our home off sooner at a lower interest rate, and also because then our PMI would still be low (believe me, we did our homework when we realized our deceitful loan officer wouldn’t tell us the truth). However, no one will give us a 15-year on a streamline because they say the payments are supposed to go lower, not higher, even though we gross $8000 a month and can totally afford the payment. Anyhow, I’m writing this because I think it’s important for loan people to be upfront with us poor FHA loanholders about this awful increase in PMI that you’re stuck with if you do a 30-year. If you have any other ideas about how we can get our interest rate down without more than doubling our PMI, let me know…..



    • Scott Sheldon on September 12, 2011 at 4:34 pm

      Hi Dawn,

      Thanks for this post. I agree loan officers need to be completely upfront with their clients. First the LO you worked with would have seen right upfront the difference between 5.5 and 4.85% wouldn’t produce the minimum 5% savings with the higher mi premiums. Yes, the guideline usually means net tangible benefit for payment savings however, there is certainly a net tangible benefit to a 15 year ie less interest, faster pay off etc. Let research this and I’ll get back with you.

      Best,

      Scott



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