Getting rid of private mortgage insurance (PMI) on your FHA mortgage is a common goal for many homeowners. PMI is an additional monthly cost that protects the lender if you default on your loan, but it can add up quickly and eat into your budget. Fortunately, there are several strategies you can employ to remove PMI and save money on your mortgage payments. Let's dive in!
Understanding PMI and FHA Mortgages
Before we discuss how to remove PMI, it's essential to understand what it is and how it relates to FHA mortgages. The Federal Housing Administration (FHA) insures loans from FHA-approved lenders, allowing borrowers to obtain mortgages with lower down payments and credit score requirements than conventional loans. However, FHA borrowers must pay an upfront mortgage insurance premium and an annual mortgage insurance premium (PMI) to protect the lender if the borrower defaults.
PMI is typically required if your down payment is less than 20% of the home's value. The cost of PMI can vary based on factors like your credit score, loan amount, and down payment size, but it typically ranges from 0.5% to 1% of the loan amount annually.
How to Remove PMI from Your FHA Mortgage
Now that you understand the basics of PMI and FHA mortgages, let's explore the different ways you can get rid of PMI and save money on your monthly payments.
1. Refinance to a Conventional Loan
One of the most straightforward methods to remove PMI is to refinance from an FHA loan to a conventional loan once you've built up enough equity in your home. When you refinance, you'll need to have at least 20% equity in your home to avoid paying PMI on the new loan.
To calculate your equity, you'll need to know your home's current value and the remaining balance on your mortgage. Let's say your home is worth $300,000, and you owe $200,000 on your mortgage. In this case, you have $100,000 in equity, which is 33% of the home's value. Since you have more than 20% equity, you may be eligible to refinance to a conventional loan without PMI.
Keep in mind that refinancing involves closing costs, so you'll need to weigh the potential savings from eliminating PMI against the upfront costs of refinancing.
2. Request PMI Cancellation
If you have an FHA loan with an original loan-to-value (LTV) ratio of 90% or higher, you can request PMI cancellation once you've reached 78% LTV based on the original value of the home. However, this option is only available if you're current on your mortgage payments and have a good payment history.
To calculate your current LTV, divide your remaining mortgage balance by the original appraised value of your home. For example, if you originally borrowed $180,000 on a $200,000 home (90% LTV), and you've paid down your balance to $156,000, your current LTV would be 78% ($156,000 / $200,000).
Once you've reached the 78% LTV threshold, you can submit a written request to your lender to cancel PMI. Your lender may require an appraisal to confirm the home's current value, and you may have to pay for the appraisal.
3. Wait for Automatic PMI Termination
If you don't take any action, your PMI will automatically terminate once you reach a certain LTV ratio, depending on the original loan term and the loan's amortization schedule.
For FHA loans with case numbers assigned on or after June 3, 2013:
- For loans with original terms greater than 15 years, PMI will automatically terminate when the remaining principal balance reaches 78% of the original value of the home, provided the borrower has made all payments on time.
- For loans with original terms of 15 years or less, PMI will automatically terminate after 11 years, regardless of the LTV ratio.
For FHA loans with case numbers assigned before June 3, 2013, PMI will automatically terminate when the remaining principal balance reaches 78% of the original value of the home, regardless of the loan term.
It's important to note that automatic termination only applies if you've made all mortgage payments on time. If you've had any late payments, you may need to take additional steps to remove PMI.
Conclusion
Paying PMI can be a significant financial burden, but there are several strategies you can employ to remove it from your FHA mortgage. Whether you refinance to a conventional loan, request PMI cancellation, or wait for automatic termination, getting rid of PMI can save you thousands of dollars over the life of your loan.
Remember, each situation is unique, so it's always best to consult with your lender or a financial advisor to determine the most suitable approach for your specific circumstances. With the right strategy, you can kiss PMI goodbye and enjoy the full benefits of homeownership.