MI removal notification letters
A reader once wrote to The Mortgage Reports asking, “My wife and I both received MIP elimination letters. Are these a scam?” Such MI removal notification letters are quite common. So it’s helpful to know what they’re all about.
Chances are, your letter won’t be an outright scam. It’s more likely to be part of a marketing campaign to get you to refinance. But whether that’s a good idea depends on your circumstances.
Read on to discover whether you should take up the offer or dump it straight in the recycling.
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About mortgage insurance: PMI and MIP
There are two main types of mortgage insurance:
- Private mortgage insurance (PMI) is required on conforming loans with less than 20% down
- Mortgage insurance premium (MIP) is required on all FHA loans, regardless of down payment
The amount of time homeowners have to pay mortgage insurance — and options for removing it — depend on their current mortgage type and loan balance.
You’ll want to fully understand how your mortgage insurance (MI) coverage works before deciding what to do about that MI removal notification letter.
Here’s what you should know.
How PMI works
PMI stands for private mortgage insurance. It applies to almost all conventional loans with less than 20% down payment — including conforming loans backed by Fannie Mae and Freddie Mac.
With PMI, you can stop paying premiums when your current mortgage balance dips below 80 percent of your home’s then market value. Once that happens, your loan-to-value ratio will be 80% or less. And that’s the equivalent of your having a 20% or better down payment.
At the time this was written, home prices were rising quickly. They shot up 11.2% as a nationwide average between March 2020 and March 2021, according to Core Logic.
With that much home equity growth, many borrowers find they have the equivalent of a 20% down payment much sooner than they expected. So conventional loan holders might be eligible to cancel PMI even if they bought their homes pretty recently.
How FHA MIP works
MIP stands for mortgage insurance premium. This type of MI is required by the Federal Housing Administration on all FHA loans.
If you put less than 10 percent down, MIP lasts the life of the loan. Unlike conventional PMI, FHA mortgage insurance does not fall off once you reach 80 percent LTV.
FHA borrowers who put down 10% or more have it a little easier. Their MIP falls off after 10 years.
USDA loans require mortgage insurance as well, which cannot be removed. Only VA loans — backed by the U.S. Department of Veterans Affairs — are free of monthly mortgage insurance.
The biggest downside of FHA and USDA loans is that their MIP requirements last the lifetime of the loan. And there’s no MI removal option with these.
Your only way to escape MI, once you have the equivalent of a 20% down payment, is to refinance into a conventional loan with no PMI.
There is one exception. But vanishingly few borrowers are likely to be eligible to take advantage of it. If your FHA loan was obtained before June 3, 2013, you may be able to cancel your MIP. If that applies to you, ask your mortgage servicer about options for MIP removal (that’s the company to which you make monthly payments).
Back to those MI removal notification letters
This is where MI removal notification letters come in.
If you bought your home with a USDA loan, or an FHA loan with less than 10% down, you can’t ever remove your mortgage insurance obligations.
No matter how cleverly the MI removal notification letter is written, understand that you’re being invited to refinance to a different sort of mortgage loan.
Of course, that may be a great idea. Refinancing into a conventional loan to remove MIP can be a great way to lower your monthly mortgage payments and save money.
But keep in mind that the sender’s motivation is to get its hands on some of your refinance costs. So you need to make sure a refinance really is the right move for you. And you need to shop around for the best refinance deal — don’t just go with the company soliciting your business via post.
How to remove FHA MIP safely
If your mortgage principal balance is 80% or less of your home’s market value, you may be able to refinance to a conventional loan and remove your MIP payments.
Keep in mind, you’ll have to meet the basic eligibility requirements for a conventional mortgage. Those typically include:
- A credit score of 620 or higher
- A two-year history of stable income and employment
- A debt-to-income ratio below 43 percent
You’ll also have upfront closing costs when you refinance.
Refinance costs are roughly similar to those you paid when you took out your existing mortgage, often around 2-5% of your new loan amount.
You may be able to get the lender to cover your upfront costs if you pay a slightly higher mortgage rate. Or, you might be able to roll them into your new mortgage which means you’ll pay them down, with interest, over the life of your new loan.
How do you know if your LTV is 80% or less?
Your loan-to-value ratio is based on the appraised value of the property. And, as the adjective implies, that’s determined by the judgment of a professional appraiser.
So how can you figure out your home’s current value before you try to refinance?
One way is to look at current listings in your neighborhood. But don’t forget those are just asking prices. There’s no telling what the seller will actually get.
You can also search for recently sold homes on many websites. But the most useful tool may be Trulia’s U.S. assessor records and other public property information. Drill down to your county and pick recent sales in your neighborhood.
In effect, you’re trying to find what real estate agents call “comps” (comparables). And those can give you a good idea of what your home’s worth.
Of course, your home’s value will likely be different based on factors like square footage, number of bedrooms and bathrooms, and any renovations you may have done since moving in.
But looking at comps should give you a ballpark idea of what local homes are worth, and whether you may have enough equity — based on your estimated value and current mortgage balance — to remove MIP.
What is the FHA-SR program?
The FHA Streamline Refinance (FHA-SR) is a great way to get a lower mortgage rate and monthly payment. It’s quicker, cheaper, and way less hassle than a standard refinance.
If you’re eligible for an appreciably lower mortgage rate than the one you’re currently paying, a Streamline Refi may seem like a no-brainer.
But there are two things an FHA-SR can’t do.
First, a Streamline Refinance cannot remove MIP. If you want to get rid of your mortgage insurance, you’ll have to refinance to a conventional or conforming loan.
And, secondly, you can’t use one of these for a cash-out refinance. If you want to take money out of your home, you’ll have to do a standard refinance, either to another FHA loan or to a different type of mortgage.
Canceling private mortgage insurance (PMI)
You’ll remember that PMI is payable on conventional home loans, including those from Fannie Mae and Freddie Mac.
If you have one of those, your lender should cancel your PMI automatically when your LTV reaches 78 percent. In other words, when you have the equivalent of a 22% down payment. So there may be no need for you to cancel PMI yourself.
You also can get your lender to carry out the cancellation manually when your LTV gets down to 80 percent. But you need to get in your request months before you reach that figure.
How do you know if you’re eligible to remove PMI?
Call your mortgage servicer (the number on your most recent mortgage statement) and request your PMI schedule. But note that the schedule is based on your home’s original value: the purchase price you paid.
If you think your home is worth significantly more now, you can request a new appraisal. And, given recent home price rises, you’d probably be right. Keep in mind, a new appraisal will likely cost you $300-$500.
PMI removal rules
You need to be aware of three rules about stopping PMI based on a new, appraised value:
- You must have owned the home for at least two years
- If you’ve owned the home for 2-5 years, you can stop paying PMI only when your LTV dips to 75%
- Only if you’ve owned the home for at least five years can you stop paying with an 80% LTV
Your next steps
So now you know. If you have an FHA or USDA loan and you receive an MI removal notification letter, it’s telling you to refinance to a conventional loan.
This can be a great way to save money on your monthly payments. And if you can lower your interest rate at the same time, you could save thousands over the life of the loan.
Just make sure to be smart about your refinance. It’s crucial to shop around for the best mortgage rate and lowest fees possible.
If you think you’re eligible to refinance, get pre-approval from at least 3-5 lenders to see which one can offer the best deal.