How To Get Rid Of Mortgage Insurance: The Best Way To Remove MIP And PMI

If you buy a house with a down payment of less than 20%, you’ll likely be required to obtain private mortgage insurance (PMI). And if you get an FHA loan, you’ll pay a mortgage insurance premium (MIP) regardless of your down payment. These two types of mortgage insurance reduce a lender’s risk and allow you to qualify for a mortgage you may otherwise not be able to get.

While the amount you’ll have to pay in PMI or MIP will depend on many different factors, this additional cost may add hundreds of dollars to your monthly housing expenses. Fortunately, you don’t have to pay mortgage insurance forever. Keep reading to learn the best way to remove MIP and PMI.

What Is PMI?

PMI is required if you make a down payment of less than 20% on a conventional loan. There are three ways you can pay PMI including:

• Borrower-paid mortgage insurance (BPMI): BPMI is an additional fee that you’ll pay along with your mortgage payment until you have at least 20% equity in your home. It’s split into monthly installments.
• Lender-paid mortgage insurance (LPMI): If you’d like to avoid tacking on a fee to your monthly mortgage payment, LPMI may be a good option. While your lender pays for the cost of the policy when you close, you’ll take on a higher interest rate. Essentially, you’re financing the cost of the policy into your actual loan. With this option, you cannot cancel PMI because the lender paid it in a lump sum, upfront.
• Single-pay mortgage insurance: With single-pay mortgage insurance, you pay for part of or all of a LPMI policy up front when you close in order to lock in a lower interest rate. If you do decide to pay off the entire policy, you’ll be able to avoid the monthly payment associated with BPMI. However, you won’t be able to cancel PMI as you’ve already paid it in full.

What Is MIP?

MIP is similar to PMI but is intended for FHA government-backed loans. There are two components for MIP: an upfront premium (UFMIP) and an annual premium. As of this writing, the upfront premium rate is 1.75% of the loan amount, due at closing, and the annual premium is 0.85%, if you make the minimum down payment of 3.5%, broken into monthly installments.

The rates are a little bit different if you have a 15-year mortgage, a higher down payment or a loan amount greater than $625,500, so it’s a good idea to consult a Home Loan Expert to get your exact numbers.

If you’re refinancing from an already existing FHA loan into a new one (FHA Streamline), the upfront MIP is only 0.01% and the annual premium is only 0.55%. If you don’t have the cash to pay for the upfront mortgage insurance premium all at one time, there’s no need to worry as it can be financed into the cost of your loan.

In addition, if your down payment is less than 10%, you’ll be required to pay MIP for the life of your loan. If your down payment is 10% or higher, you’ll pay MIP for 11 years.

Other Types Of Required Loan Fees

USDA Loan Fees

If you opt for a USDA loan, you can expect to pay a guarantee fee, instead of a PMI or MIP. The upfront fee is 1% of the loan amount and can be built into your principal balance if you’re unable to pay it at closing.

In addition to an upfront guarantee fee, you’ll be subject to an annual fee of 0.35% of the average unpaid principal balance at the end of each year. This will be based on the original amortization schedule for the loan and split into monthly payments.

The most popular USDA loan is the USDA Guaranteed Loan, which is offered through private lenders. While it’s uncommon to get a USDA Direct Loan, which is offered directly through the USDA, you won’t be charged a guarantee fee if you do go this route.

As of July 6, 2020, Rocket Mortgage^® is no longer accepting USDA loan applications.

VA Loan Fees

Although the VA loan doesn’t come with mortgage insurance, there’s a funding fee that can range from 1.25% – 3.3% of your loan amount. This funding fee can be built into your loan and will depend on a couple factors including:

• Whether or not it's your first time using a VA loan
• The size of your down payment

If you pursue a VA Streamline where you refinance an existing VA loan to reduce your rate or change your term, your funding fee will be 0.5%. You may be exempt from this funding fee if you meet one of these criteria: 

• You’re receiving disability income from the VA.
• You're a surviving spouse of a military member who passed away in action or as a result of a service-related disability.
• You’re a Purple Heart recipient that is still active duty.

How Much Does Mortgage Insurance Cost?

If you decide on BPMI, your mortgage insurance will cost anywhere between 0.5% – 1% of your loan. Your rate will depend on factors such as your loan-to-value ratio (LTV), credit score, loan type and occupancy.

The same qualification factors that affect BPMI will also affect LPMI. In short, the less risky you appear to a lender, the lower your upward rate adjustment will be. Since lenders have different deals with insurers in the private mortgage insurance space, the cost of mortgage insurance is an important factor to consider when you’re shopping around for a lender.

When it comes to the cost of mortgage insurance for FHA and USDA loans, rates and guarantee fees are set forth by the government so there’s no difference in price between the two.

Factors That Influence Your Mortgage Insurance

Loan-To-Value Ratio

Your loan-to-value ratio (LTV) is a measure of how much equity you’ve built up in your home. To calculate it, you’ll divide the amount you borrowed by the appraised value of your property. For example, if you buy a house for $250,000 and it’s currently worth $265,000, your loan-to-value ratio is 94.3%. In most cases you’ll need to pay mortgage insurance if your loan-to-value ratio is more than 80%.

Credit Score

Your credit score is a three-digit number that shows how likely you are to repay debt. The higher your credit score is, the less you’ll likely pay in mortgage insurance. For the purposes of mortgage qualification, the score that matters most is your median FICO^® Score between the three reporting bureaus. If your credit score is 700 or above and considered “good” or “excellent,” you can expect to pay less in mortgage insurance than a borrower with a credit score in the 500s or 600s.

Loan Type

The type of mortgage loan you take out will also have a significant impact on your mortgage insurance.

• FHA: With the FHA loan, you’ll have to pay mortgage insurance regardless of the down payment. However, if you put down at least 10%, it will fall off after 11 years. Otherwise, it remains for the life of the loan.
• VA: If you take out a VA loan, you won’t have to pay mortgage insurance. Instead, there's a one-time funding fee that can be built into the cost of the loan or paid at closing. You may even be able to take out a mortgage without a down payment as well.
• USDA: While you may not have to put any money down with a USDA loan, you’ll need to pay a mortgage insurance rate that’s currently 0.35% per year for as long as you have the loan in addition to a 1% upfront guarantee fee which may be built into the cost of the loan.
• Conventional: If you have enough equity in your house, you won’t have to pay PMI. For a single-unit primary property, that magic number is 20% equity.

How To Get Rid Of PMI

There are a number of factors that go into whether you can get rid of PMI. These factors include (but aren’t limited to) how much equity you have in your home and whether your equity has increased either because you’ve made improvements or the market value of your home has gone up. The number of years you’ve been paying mortgage insurance will play a role as well.

How To Get Rid Of MIP

If you’d like to get rid of MIP, you have two options. You can make a down payment of 10% or more and be MIP-free after 11 years. Alternatively, you can refinance into a conventional loan once you’ve reached 20% equity.

Now that you’re more familiar with mortgage insurance, you can apply for a home loan online through Rocket Mortgage^® . One of their friendly and knowledgeable Home Loan Experts will be happy to assist you. Call today at (888) 452-8179.