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Mortgage insurance is the magical loan product that makes it possible to buy real estate with less than 20% down. Without it, many potential purchasers would never be able to save the down payment money needed to be a homeowner.
Although mortgage insurance – MI – is a valued financial tool, it’s not free. Such insurance can cost thousands of dollars per year, an expense that’s difficult to end without refinancing.
Why Do I Need Mortgage Insurance?
At this writing the typical existing home sells for about $375,000. To buy with 20% up-front – the down payment percentage that lenders want without MI – a borrower will need $75,000 ($375,000 x 20%) in down payment cash plus closing costs.
With MI in the picture lenders don’t need 20% down. They’ll take less – a lot less. For instance, financing is available with 3.5% down with backing from the FHA, nothing down for VA and USDA borrowers, and as little as 3% down with conforming mortgages.
How Much Does Mortgage Insurance Cost?
Like auto insurance or life insurance, mortgage insurance is paid with premiums.
FHA Loans. Qualified borrowers can buy with just 3.5% down with FHA backing. That’s $13,125 ($375,000 x 3.5%) for a $375,000 mortgage and a lot less than the $75,000 lenders usually want. The loan balance is $361,875.
With the FHA there’s an upfront mortgage insurance premium (the upfront MIP) equal to 1.75% of the mortgage amount, or $6,334 ($361,875 x 1.75%). Most borrowers add the upfront MIP to the loan balance rather than pay for it with cash at closing.
The FHA program also has an annual MIP equal to .55% of the loan amount. In this example, the MI cost for our model loan is $256 a month or $3,073 a year.
Conforming Loans. A “conforming” mortgage is a loan lenders can sell to Fannie Mae or Freddie Mac, financing that generally requires 20% down. Borrowers, however, can purchase with conforming loans and pay as little as 3% upfront by using private mortgage insurance (PMI).
“Private mortgage insurance (PMI) rates vary by down payment amount and credit score but are generally cheaper than FHA rates for borrowers with good credit,” according to the Consumer Financial Protection Bureau (CFPB).
“Most private mortgage insurance,” it adds, “is paid monthly, with little or no initial payment required at closing.”
VA Loans. Qualified veterans can finance with zero down through the VA mortgage program. Backing from the VA is in the form of a loan guarantee.
VA borrowers pay for the guarantee with an upfront “funding fee.” The size of this one-time fee ranges from 0.5% to 3.3% of the loan amount and depends on such factors as whether you’re a first-time VA borrower and down payment size.
There is no monthly funding fee cost with VA financing.
» MORE: See today’s refinance rates
How Can I Cancel Mortgage Insurance?
Once you have FHA or conforming loans it’s extremely difficult to cancel the monthly mortgage insurance charge.
First, if you financed with the FHA program and put down at least 10% you can cancel monthly mortgage insurance payments after 11 years. However, since most FHA borrowers finance with just 3.5%, mortgage insurance continues until the mortgage is paid off or refinanced.
Second, borrowers can cancel conforming loan PMI in several ways.
- According to the Consumer Financial Protection Bureau (CFPB), you can ask the lender to cancel PMI when “the principal balance of your mortgage is scheduled to fall to 80 percent of the original value of your home.” This won’t be anytime soon. For instance, if you borrow $375,000 at 6.5%, the principal balance will only drop to $300,000 (80% of the original debt) after 12 years.
- Or, if you are current on your payments, MI will automatically be canceled on the “date when your principal balance is scheduled to reach 78 percent of the original value of your home.” That will take almost 13 years.
Veterans can elect to either pay the upfront funding fee in cash or add it to the VA loan amount. The VA loan program does not require a monthly funding fee, so there are no monthly guarantee charges to cancel.
Refinancing to End Mortgage Insurance
It takes a very long time to cancel mortgage insurance for conforming and FHA mortgages. In many cases it will never happen.
According to the National Association of Realtors (NAR), in 2023 sellers typically lived in their home for 10 years before selling.
Meanwhile, as a result of rising home prices, many borrowers have 20% equity and often much more. According to NAR, existing home prices rose 9% in 2019, 12.9% in 2020, 15.4% in 2021, and 10.22% in 2022.
Metro prices rose 3.9% in 2022, but fell .2% in the first quarter of 2023.
In other words, millions of homeowners have enough equity – that important 20% – to refinance today and end monthly mortgage insurance payments.
Is there a catch? Yes. Not only have home prices gone up in recent years, so have mortgage rates.
This means borrowers have to see if the benefit from eliminating monthly mortgage insurance payments is enough to make refinancing worthwhile.
What to do next? Keep your eye on mortgage rates and look for refinancing opportunities that reduce your overall monthly mortgage payments.
Be sure to ask lenders if a refinance will end mortgage insurance charges.