Mortgage insurance can be an expensive part of your home loan payments. On average, insurance can range from 0.4% to 0.85% of your original loan amount. Depending on the size of your home loan, that could increase your mortgage costs by several thousand dollars each year.
So naturally, the sooner you can eliminate mortgage insurance, the better. But does it ever make sense to refinance your mortgage to remove that ongoing insurance fee?
What is mortgage insurance?
Mortgage insurance helps protect your mortgage lender. You’re typically required to buy a mortgage insurance policy, for the lender’s benefit, when your down payment is less than 20%. Why? Your lender is taking more risk by allowing you to pay less money up front. The insurance gives your lender extra protection in case you stop making payments on your loan.
When can I stop paying mortgage insurance?
If you have a conventional mortgage, the type of insurance you pay is called private mortgage insurance (PMI). Once the principal balance on your mortgage drops to 80% or less of the original value, or current appraised value of your home, you can ask your lender to remove PMI.
Federal law also requires your lender to automatically cancel PMI when your mortgage reaches a 78% loan-to-value (LTV) ratio.
The situation is different if you have a government-backed loan, such as a Federal Housing Administration (FHA) loan. Insurance on an FHA loan is called a mortgage insurance premium (MIP). The only way to remove MIP on an FHA loan is to sell the home or refinance your loan into a conventional mortgage.
Would refinancing help me remove my mortgage insurance earlier?
There are two cases in which a refinanced loan could speed up your ability to cancel mortgage insurance:
- If you refinance an FHA loan into a conventional loan.
As long as your new loan is 80% or less of your home’s value, you won’t be required to carry mortgage insurance (neither MIP nor PMI). Example: For a refinanced, conventional $190,000 loan on a home worth $250,000, the LTV is 76%, so mortgage insurance is no longer required.
- If refinancing helps you hit the 80% LTV mark.
Here’s how that works: Your refinanced loan amount may be less than your old mortgage (typically because you refinanced at a lower interest rate). At the same time, the home appraisal required for your refinance may show that your home has increased in value. Those two factors together — smaller loan and higher home value — could put you at or below the 80% LTV ratio eliminating the mortgage insurance requirement.
Are there any other factors to consider before refinancing?
If one of your main reasons for refinancing is to eliminate PMI, first get a quick estimate of your home’s current value. You can get a rough estimate on Zillow.com or through a local real estate agent.
If your home value has increased significantly, you may be able to simply pay for an appraisal (or home value assessment) in order to get your bank to remove your PMI. An appraisal is typically less expensive and time-consuming than refinancing.
Unsure whether you should refinance to eliminate mortgage insurance? Talk to us. A Wells Fargo home mortgage consultant can help you determine how much money you stand to save during a refinance and if there are any downsides to refinancing.