How Property Taxes and Insurance Can Affect Your Monthly Mortgage Payment - Quicken Loans Zing Blog

Mortgage insurance provides a lot of flexibility in the purchase process. You can get a loan with a much lower down payment because the mortgage insurer takes on part of the risk if the unthinkable happens and you can no longer make your payments.

Lower down payments are one benefit of mortgage insurance from a client perspective, but it still amounts to an extra monthly fee as part of your mortgage payment. No one likes paying more than they have to.

There are a couple of ways you can avoid paying for mortgage insurance on a monthly basis. You can also get rid of it – often by refinancing. We’ll look at each option. But first, let’s take a look at how mortgage insurance works and some of the more common questions.

What Is Mortgage Insurance, and How Does It Work?

A down payment of 20% or more on a home isn’t feasible for a lot of us. Mortgage insurance enables you to make a lower down payment. In exchange, your lender or mortgage backer (think Fannie Mae, Freddie Mac, FHA, USDA, etc.) will almost always require some form of mortgage insurance.

Mortgage insurance is a premium paid by the client in one way or another. We’ll go over the ways this is financed in just a bit.

Why Do I Have to Pay Mortgage Insurance?

The idea behind mortgage insurance is that the insurance pays the lender or mortgage investor something in the event that the loan goes into default and the investor has to take the home back and deal with the expense of selling it again.

Because you’re making a lower down payment, the lender or mortgage investor takes on additional risk in giving you a home loan. The insurance helps mitigate that risk.

How Long Do I Have to Pay Mortgage Insurance?

How long you end up paying for mortgage insurance depends on the type of loan you get and occasionally on the size of your down payment. We’ll go over this in more detail below when we get to how you go about getting rid of mortgage insurance, but below is a general quick reference guide.

You can cancel mortgage insurance yourself on conventional loans once you reach 20% equity for a single-unit primary property. Mortgage insurance on multi-unit and investment properties comes off at the midpoint of the loan (e.g., 15 years on a 30-year term).

With an FHA loan, you’ll likely be paying mortgage insurance premiums (MIP) for the life of the loan unless you make a down payment of 10% or more. In that case, MIP comes off after 11 years.

USDA loans have something called guarantee fees that serve the same function as mortgage insurance. You pay these for the life of the loan.

“Life of the loan” is the key phrase there. You’re often not stuck with mortgage insurance for life.

How Do I Get Rid of Mortgage Insurance?

OK, so you have mortgage insurance. When can you get rid of it? The answer depends on the type of loan you have as well as your property type.

Conventional Loans

Conventional loans are the most complicated when it comes to mortgage insurance removal scenarios because they support the most different property types and cancellation scenarios.

We’ll cover the most common mortgage insurance cancellation scenario – cancellation on your single-family primary property or second home based on equity – in this post. However, you should know there are different requirements if you’re trying to cancel based on a significant increase in market value or after significant value-adding improvements. It can also be slightly harder to remove PMI on a two- to four-unit primary or investment property.

For more details on these specific situations, check out this in-depth breakdown of mortgage insurance cancellation, which includes a quick reference chart you can apply to your situation.

On single-unit primary homes, private mortgage insurance for conventional loans automatically comes off when you reach 22% equity in your home based on the original amortization schedule (meaning you didn’t make extra payments to get to that point).

If you want to get rid of your monthly mortgage insurance payment earlier by systematically paying down your loan balance, you can request PMI cancellation once you reach 20% equity based on the original loan balance. It’s important to note that your home has to be reappraised to make sure it didn’t go down in value between now and the close of your loan.

Everything we’ve talked about up to this point deals with the cancellation of what’s known as borrower-paid mortgage insurance (BPMI). However, there’s a way to avoid monthly mortgage insurance payments altogether on conventional loans.

Lender-paid mortgage insurance (LPMI) is an option, which is where you or your lender pay for your mortgage insurance policy upfront in order to avoid tacking it on to your monthly payment. There are a couple different ways this can work.

In one common option, your lender pays for your mortgage insurance policy upfront. In exchange, you take a slightly higher rate than what you would have with BPMI or without mortgage insurance. Every situation is different, but taking a higher rate could save you money vs. paying a separate fee for mortgage insurance. Remember that your mortgage interest is tax-deductible as well.

In the alternative version of LPMI, you can choose to pay for your entire mortgage insurance policy at closing, thereby getting the same rate you would have if you hadn’t taken LPMI at all. You may hear this referred to as single-pay mortgage insurance.

There’s also a hybrid approach. You can make a partial payment on your mortgage insurance policy upfront in order to get a lower rate with LPMI.

FHA and USDA Loans

If you have an FHA loan, in the majority of cases, you’re going to pay mortgage insurance for the life of the loan. If you have a 10% down payment in the case of a purchase or 10% equity in the case of a refinance, you’ll pay MIP for 11 years. Otherwise, MIP is for the term of the loan.

If you haven’t purchased or refinanced with an FHA loan since June 3, 2013, the requirements are different, and your MIP will eventually fall off. It’s beyond the scope of this post, but the requirements are in the post we linked to above on mortgage insurance cancellation.

If you have a USDA loan, the guarantee fees on that last for the full term of the loan.

However, it doesn’t mean you can never stop paying these premiums if you’re currently in an FHA or USDA loan. Assuming you meet the other qualification factors (e.g., a 620 median FICO® score for an FHA, 640 for USDA), you can refinance into a conventional loan and request mortgage insurance removal once you reach 20% equity in your home.

That’s about all there is to say about mortgage insurance. If you still have questions, you can leave them in the comments below. If you would like to speak with one of our Home Loan Experts about your options, give us a call at (800) 785-4788.

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This Post Has 29 Comments

  1. I purched a home through FHA it was a Rual development peogram that gave 5,000 down at closing and after 5 years it is to be forgiven, and out of pocket it was less than 10% down. If I wait out the 5 years and refinance to a conventional loan as long as my appraisal is over the 20% mark will I be able to avoid MIP and PMI since the Property is over the 20% mark?

    1. Hi Melvin:

      I don’t know the specifics of that particular program, but I can speak about things from an equity standpoint. If the $5,000 down is eventually applied to your regular loan balance, it counts toward your equity. If you were eventually able to get to 20% equity at any time after that five-year point, you could refinance into a conventional loan if you met the qualifications. If the combination of the new appraisal and the lowering of your loan balance by your monthly payments on the previous loan showed you had reached 20% equity, you wouldn’t have to pay any mortgage insurance on the conventional loan. Hope this helps!

      When you’re ready, you can go over the loan options online with Rocket Mortgage or go ahead and give us a call at (888) 980-6716 to speak with one of our Home Loan Experts. Have a good day!

  2. I purchased a home in June 2018. I paid the PMI upfront approx. $4500. I just invested $60,000 remodeling the house which I am sure it increased the value of the house to give me more than 20% on equity. Can I submit a new appraisal to the lender to proof that I have the 20%+ equity and refund the PMI money I paid upfront? or apply that money toward the principal of the loan?
    Thanks for your prompt response
    Oscarina Alvarez

    1. Hi Oscarina:

      There are multiple elements here, so I’m going to try to go over them one at a time.

      1. You can ask for a new appraisal. You may or may not have to pay for it through your servicer.
      2. If your investor is Fannie Mae, you actually have to show 25% equity after home improvements in order to take the mortgage insurance payment off a one-unit primary home. If the investor is Freddie Mac, the guideline is still 20% after home improvements.
      3. There’s no refund of upfront or monthly PMI payments. You just get to stop paying it once you reach the requisite amount of equity.

      Hope this helps clarify things!

  3. hello, we refinanced our house back in march of 2013 for a lower interest rate. it is an fha loan and in my original loan paperwork(its been sold a few times since to other banks) it says my mip stops april 1st, 2018. I called the current holder of the loan and was told it does not acct my house appraised for only 413,000 but that was what my loan amount was. they used my original purchased price when I refied which was 475,000.00. how do I fight that one?

    1. Hi Dave:

      I’m a little flummoxed here. For starters, your loan is based on what the house appraises for when you refinance and how much equity you have compared to the original loan amount. However, if your paperwork says you should stop paying MIP as of April 1, I would ask them what changed from the paperwork you had. Property values have been in an upward cycle, not a downward one. You do have to pay MIP for at least five years on a 30-year loan and you have to have at least 22% equity to get rid of MIP. I would talk to your servicer and ask them what changed. I would hope they have a detailed explanation.

      Thanks,
      Kevin

  4. Question- I have a VA 15 year refinance mortgage with QL. I am 75 years of age, and my wife (67 y.o.) is concerned that I do not have life insurance. At this age, am I eligible for mortgage insurance on my $100,000 balance? Do I need insurance on a VA loan to insure that she can remain in the house if I die before the loan is paid? The property appraisal one year ago was for $165000. I do not want her to lose the equity due to a foreclosure.

    1. Hi Cecil, mortgage insurance is actually for the protection of the lender. What you are referencing is mortgage life insurance, you may want to reach out to a mortgage life insurance provider for more information. Thanks!

  5. We purchased our home in December of 07 for $132000 it’s now worth $175,000 and we owe around $104,000. We pay Mip and I want to know at what point can we stop MIP and if we don’t ever default on the loan then do we get MIP back? Probably not but thought I’d check.

    1. Hi Brandi:

      The bad news is that you never get mortgage insurance payments back. The good news is that you’re almost done paying mortgage insurance. FHA calculates your amount of equity based on the original value of the home for purposes of when mortgage insurance does or doesn’t come off. Because you’ve had your home since December 2007, it automatically cancels once your equity reaches 22%. Based on my calculations, you’re about 0.78% away from hitting that mark. I hope this helps!

      Thanks,
      Kevin Graham

    1. The money you pay for “pmi” is the premium for Private Mortgage Insurance. Just like your health or auto insurance premiums, you will not get it back.

  6. I️ bought a home in 2012 for 142,000. I️ owe just under 125,000 and I️ pay MIP. Will I️ ever be able to not pay MIP after I️ pay down a certain amount ?

    1. Hi Heather:

      If you haven’t refinanced since 2012, your MIP can come off. The exact circumstances depend on whether you have a 15-year loan or any other term. I’m also assuming your loan is current and you haven’t been late in the last year.

      You currently have about 12% equity in your home. If you have a 15-year loan, your MIP can come off when you reach 22% equity regardless of how long you have been making payments.

      If you have any term other than 15 years, your MIP can cancel at 22% equity provided you’ve been making MIP payments for at least five years. I hope this helps!

      You can also refinance into a conventional loan down the line if you want. If you would like to look into your options to do that, you can do so through Rocket Mortgage or give us a call at (888) 980-6716. One of our Home Loan Experts will be happy to work with you.

      Thanks,
      Kevin Graham

  7. If you pay cash for a property,do you have to get insurance on that property even tho the house is going to be tore down,and pool covered up

    1. You don’t have to worry about mortgage insurance, but some sort of personal property insurance to protect any assets being kept on the property might be something worth looking into. Hope this helps!

  8. hello , I bought a house last year, they made me pay lump sum $8960 for MIP . I am also paying monthly PMI of about $300. Can I thought MIP was for FHA loan. Can they charge me for both? I only put 5% down on a $539,000 house.

    1. Hi Joyce:

      That depends on the type of loan you have. MIP is only for FHA loans. You’re correct. That being said, the USDA has something called a guarantee fee with its loans where you do pay a certain amount up front and then a little every month for something that functions similarly to mortgage insurance. If you have a VA loan, it also has a guarantee fee that you pay upfront and never pay again. However, if you didn’t have it all up front, they can also roll that into of the loan and you can pay on that monthly. There’s also the possibility that you were paying for mortgage interest points and not MIP which is mortgage insurance premium. Mortgage interest points enable you to get a lower rate and make a lower monthly payment. That said, they have nothing to do with mortgage insurance.

      I can only theorize about what might be happening. One of our Home Loan Experts could take a deep dive into your situation and give you more insight into exactly what’s going on. You can get in touch with them by calling (888) 980-6716. Hope this helps!

      Thanks,
      Kevin Graham

    1. Hi Karen:

      Lenders compare your gross monthly income to any debt payments reported on your credit report for things like student loans, personal and car loans, housing payments and credit cards. You can find more information in this post on debt-to-income ratio.

      Thanks,
      Kevin Graham

  9. LPMI means the lender pays the full premium up front and in exchange you accept a higher interest rate. If you look at the total cost of both loans most often the only time it is beat to not do LPMI is if you intend to keep your mortgage the full term utility paid off. If you look at the amortization of a 30 year mortgage it is years before the loan is down to where the PMI can be removed. When we bought our first home and needed PMI I looked at both amortization schedules and calculated how long we needed to keep the mortgage to not save money with LPMI and on the off chance we have the mortgage until paid in full how much more LPMI cost (our answer about $2000).

    1. Hi Stephanie:

      You’re exactly right about how all LPMI programs work. And you definitely have to do the math to see whether it makes sense for you based on both your current situation and expectations of your future plans. That being said, sometimes the rates are different from lender to lender because there are negotiations that take place with insurance providers, so the rates for LPMI are not all the same.

      Thanks,
      Kevin Graham

    1. Hi Mike:

      LPMI programs just get rid of the monthly mortgage insurance cost being added to your bill. The way PMI Advantage and similar LPMI programs from other lenders work is that you take a slightly higher interest rate in exchange for us paying for the mortgage insurance up front. This still ends up being a better deal mathematically for many clients. Hope this helps clarify!

      Thanks,
      Kevin Graham

  10. lender paid mortality Insurance????? how is this lender paid if the cost is integrated in to your loan? seems like the borrower is still paying for it.

  11. My concern is I have a30 year refinance quicken loan. What if I get in a car accident and I’m laid up for months in rehab. Will my insurance help pay the mortgage?

    1. Hi Dee:

      Unfortunately, mortgage insurance is meant to protect the lender and investor in the loan. If you default, it pays off so not as much money is lost on their end. In order to have payments made in the event of a medical or other emergency, you would need another type of insurance. The benefit of mortgage insurance from a client perspective is that by paying it, you get to make a lower down payment rather than putting 20% down. I know that’s not the answer you’re looking for, but hopefully, it helps clarify things.

      Thanks,
      Kevin Graham

  12. Hi everyone l need some information about fha loan for example if putting twenty percent down did l avoid pmi or mip on the loans for the house

    1. Hi Fuad:

      With an FHA loan, even if you put 20% down, you’re still going to pay mortgage insurance for 11 years. You can avoid mortgage insurance with a 20% down payment on a conventional loan. Conventional loans do require a 620 credit score. Hope this helps!

      Thanks,
      Kevin Graham

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