Are you stuck paying for private mortgage insurance (PMI) and want a way to reduce or eliminate the payments? For many homeowners, PMI is what enables them to become homeowners. Saving a 20 percent down payment could take many years otherwise. However, just because it's useful doesn't mean you have to like paying for it. And there are ways you might reduce or eliminate the expense from your monthly payments, perhaps saving hundreds a year.
Strategies for Paying Less
The most important factors that determine your mortgage insurance premiums are the size of your down payment and your credit score. Increasing your credit score or the amount of home equity you have could cut or even eliminate your mortgage insurance costs.
If you have a poor credit score, cleaning up your finances could enable you to refinance the mortgage, potentially reducing your mortgage insurance costs as well as your mortgage rate. Here's how one of the country's largest mortgage insurer sets its rates for a 90 percent mortgage.
- FICO of 620 - 679 equals .71 percent rate, which is $118 per month fora $200,000 mortgage.
- FICO of 680-719 equals .57 percent rate, which is $95 per month for a $200,000 mortgage.
- FICO of 720-759 equals .44 percent rate, which is $73 per month for a $200,000 mortgage.
- FICO of 760 and up equals .39 percent rate, which is $ 65 per months for a $200,000 mortgage.
Home Appraisal Could Help
If you think the value of your home has gone up since purchasing it, paying for a new appraisal could prove that your home value has increased, forcing the mortgage insurance to terminate your coverage.
Don't go out and order an appraisal and expect your mortgage servicer to just drop your coverage. Fannie Mae says that the servicer (the company you send your mortgage payments to) must select an appraiser, order the appraisal, receive the results directly, and send a copy of the appraisal to you. You, the borrower, must request termination in writing, you'll have to pay for the appraisal and there is no guaranty that your home's appraised value will be higher. If you've been paying your mortgage for five years or longer, the loan-to-value ratio must be 80 percent or lower to cancel PMI. If you've had your loan for less than five years, the loan-to-value must be 75 percent or lower.
Ask Your Lender to Pay
When you purchase or refinance property, you may be able to select a loan with lender-paid mortgage insurance. In exchange for the lender covering the PMI costs, however, you pay a higher interest rate. There might be an advantage of choosing a higher rate if your income is too high to allow you to deduct mortgage insurance premiums at tax time -- you'd still be able to deduct mortgage insurance. The disadvantage, though, is that your mortgage rate does not drop -- regardless of your loan-to-value.
Refinancing FHA Home Loans
FHA and other government loans also require insurance, but it doesn't come from private companies. It comes from the agency that backs your loan -- the FHA, VA or USDA. FHA mortgages require upfront premiums of 1.75 percent of the loan amount as well as monthly mortgage insurance premiums (MIP). In addition, most homeowners are required to pay the premiums for the entire duration of their loans, regardless of the equity built up. The only way to rid yourself of FHA's MIP is to refinance to a non-government (conventional) loan.
PMI Isn't a Life Sentence
While no one likes paying for mortgage insurance, you can take comfort in the fact that it won't go on forever. If your loan is in good standing, meaning you are current and you have a good payment history, your lender is required to terminate coverage as soon as your loan balance drops to 78 percent of the home's purchase price (or appraised value) that applied when you closed your loan. So if you purchased a home for $100,000 with a $90,000 mortgage, your mortgage insurance should terminate automatically when the balance drops below $78,000.