REGION – For many homeowners, mortgage insurance is just part of the deal when buying a home with a lower down payment. But what many homeowners don’t realize is that this fee doesn’t always have to stay for the life of the loan.
Depending on the type of loan you have, there may be a path to removing it and lowering your monthly payment in the process.
FHA loan
FHA loans include mortgage insurance premium (MIP), and, in many cases, it doesn’t go away on its own. If you put less than 10% down, MIP typically stays for the life of the loan. If you put 10% or more down, it may fall off after 11 years
Many homeowners choose to refinance to a conventional loan once they’ve built enough equity. As your home value increases and you pay down your loan, you may reach a point where you no longer need mortgage insurance at all. That could allow you to eliminate monthly mortgage insurance, potentially lower your payment, and/or move into a loan structure with more long-term flexibility.
A common benchmark is reaching around 20% equity, though options can vary based on your situation.
Conventional loan
With a conventional loan, private mortgage insurance (PMI) isn’t always permanent, but it doesn’t always disappear right away either. PMI is typically required if you put less than 20% down, but it can be removed once you reach enough equity. This can happen if you request removal once your loan balance reaches 80% of your home’s value, or through automatic removal around 78% based on the original value. Refinance if your home’s value has increased and you’ve built equity faster than expected.
Refinancing can be especially helpful if your home has appreciated, since it may allow you to remove PMI sooner than waiting on your original loan schedule.
What this could mean for you
Home values have shifted over the past few years, and many homeowners have more equity than they think. In some cases, home price growth alone may have increased your equity more than expected, even if you haven’t owned your home for long.
If mortgage insurance is still part of your monthly payment, it may be time to take a closer look at your loan. Because once you have enough equity, that extra cost doesn’t always need to stick around. And in many cases, a quick review of your loan can show whether removing it is already within reach.
Submitted by Victoria Blodgett, PrimeLending, Ludlow, Vt.