How to Stop Paying PMI or FHA MIP
If you have a mortgage, you know that there are many things added to your payment aside from the principal and interest. In addition, you’ll be paying into escrow to pay your homeowner’s insurance and property tax.
You’ll also notice something called PMI or MIP, which is mortgage insurance.
Lenders require you to pay mortgage insurance because it reduces their risk when you take out a loan. However, the rate you pay will vary between 0.5% to 1.5% of your loan amount per year –so it’s often a thousand or more dollars per year in payments.
Obviously, it’s in your best interest to stop paying mortgage insurance.
Types of Mortgage Insurance to Consider
You may be paying one of two types of mortgage insurance:
- PMI, or private mortgage insurance, is required for non-government loans when your loan-to-value (LTV) ratio is higher than 80%. For example, if you put a 20% down payment on the loan, you won’t need to pay PMI.
- MIP, or mortgage insurance premium, that is assessed to all FHA loans.
Removing these payments will depend on the loan type.
How to Stop Paying PMI
PMI payments are easier to stop than MIP payments. Lenders of conventional loans want to limit their risk, so the PMI payment will also be removed once the risk is gone. There are a few ways to get rid of PMI:
- Provide a down payment of at least 20% when securing the loan
- The lender will cancel PMI once your LTV is 78%
- Request the PMI be canceled before the 80% LTV if you meet specific criteria
- PMI is canceled at the midpoint of the loan
For example, if you have a 30-year mortgage, PMI is canceled when you’re in your 15th year of payments if it hasn’t been canceled due to your LTV.
PMI offers numerous methods of stopping paying this type of insurance. However, MIP is a little more difficult to cancel.
How to Stop Paying for MIP
MIP is more difficult to cancel, but it is possible and may save you a lot of money each month. If you have an FHA loan, you’re required to make the payment for the loan’s lifespan. One way to cancel your MIP is to refinance into a conventional loan.
The idea is to switch to a conventional loan if your credit score has improved drastically or if your LTV is below 80%.
Even if you have to pay them, PMI rates are cheaper than MIP rates in most cases. If interest rates are favorable, you can refinance knowing that your LTV will, eventually fall below 80%.
Refinancing if you have an FHA loan is the only option you have to get rid of MIP.
However, if you still have to pay PMI, you have a few opportunities to lower your LTV, such as:
- Showing that your home’s value has increased, so LTV is lower
- Paying down the loan faster to reach 80% LTV and cancel out PMI
If you follow the guidelines above, you’ll reduce your monthly mortgage payment by eliminating your PMI / MIP.