Are you still paying for mortgage insurance? Here’s how to cut yourself loose from this monthly cost ASAP

It’s getting harder than ever to save for a down payment on a new home, with the latest data showing that 81% of aspiring homeowners in the U.S. say that down payment and closing costs are an obstacle to their dream of owning a home (1). This makes the standard advice that putting a 20% down payment on your home seem passé — but is it?

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There are several advantages to the 20% rule, including that it lowers your mortgage rate and increases your mortgage approval chances. Of course, putting more down up front also means that your monthly mortgage payments will be less. The biggest advantage of all, however, is that with a down payment of 20% or more, you don’t need to pay extra for private mortgage insurance (PMI).

Usually paid as a monthly premium of 0.46% to 1.50% of your total mortgage cost, this insurance fee can add up over the life of your loan. You should also know that PMI protects the lender in the case that you default on your loan — it doesn’t protect you. The good news is that once you’ve built enough equity in your home, your PMI should be automatically cancelled.

However, some new homeowners find that even once they’ve reached the 20% equity threshold, they may still be charged for PMI. That’s why it’s critical to understand your documentation and know how much each monthly mortgage payment is impacting your equity. You could potentially save money in the process.

The facts about PMI

While PMI is usually cancelled once you reach 20% equity, you should know that the process differs depending on your type of insurance. PMI is split into two categories: Borrower-Paid Mortgage Insurance (BPMI), which you pay as a monthly fee as part of your escrow account, and Lender-Paid Mortgage Insurance (LPMI), which your bank or mortgage lender pays, often using a higher mortgage rate to offset their cost.

Depending on your type of mortgage insurance, there’s a different process for removing your PMI. With BPMI, you can request your lender to remove the charge once you hit the 20% equity level.

With LPMI, on the other hand, you have to refinance your mortgage in hopes of getting a lower rate. There are various fees that apply to refinancing that may make this option more costly. Plus, LPMI automatically comes off once you reach 22% equity, according to federal law.

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FHA loans

What about if you have a Federal Housing Administration (FHA) loan? This type of loan tends to have lower down payment requirements than regular mortgages and is intended to help make property ownership more accessible to first-time buyers. FHA loans also come with an insurance fee called Mortgage Insurance Premium (MIP), which is similar to PMI but the rules for how to remove it vary depending on when you first received your loan.

For loans issued before June 3, 2013, MIP is usually canceled when your loan-to-value ratio reaches 78%. For more recent loans, MIP is automatically canceled after 11 years if you made a down payment of at least 10%. However, if your down payment was less than this amount, you will be required to pay MIP for the lifetime of your loan.

There are a couple of options for getting rid of MIP. First, you can check to make sure that you meet the criteria for automatic removal. If you’re still paying, contact your loan servicer for clarification. Second, you can consider refinancing for a conventional mortgage. Just be aware that this is a lengthy process that comes with its own costs, so be sure that you will really save money if you want to pursue this option.

How to cancel your PMI

If you’re below the 20% equity threshold right now, the best thing you can do is to make extra payments on your mortgage if your lender allows. If you’ve reached 20% or are nearly there, you can contact your mortgage servicer to start the process — all it takes is a minute.

Note that the request must be submitted in writing, and your servicer should be able to tell you how best to submit this.

You may also require a home valuation so your lender can make sure your property value hasn’t fallen. You’ll also need a solid payment history on your mortgage with no missed payments, and no liens on the property.

After this process, keep an eye on your mortgage statements. That way you’ll be sure the charge has come off and you’re no longer paying for mortgage insurance.

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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.