There are situations when it is possible to refinance your home loan and eliminate the mortgage insurance charge early. Even as mortgage rates have increased, the savings from eliminating mortgage insurance can justify the higher rate.
VA and USDA Loans
These loan programs offer advantageous loan terms to military veterans and people living in rural areas. In lieu of mortgage insurance, the VA loan requires a small, up-front charge that is financed into the loan. The USDA loan requires both a small, up-front charge and a small monthly fee that is 0.4% of your the loan amount.
Both programs are inexpensive and have favorable terms. Refinancing is extremely beneficial when the borrower is able to obtain a lower rate.
Click here to read about the USDA and VA mortgage insurance structures.
The FHA loan has a relatively complicated mortgage insurance structure that recently underwent a few importance changes.
At base, the important this to know is that FHA loans taken out after April 1, 2013 are more expensive for borrowers, thus making the benefits of refinance (when possible) even larger.
The changes did two things:
- Increased monthly insurance payments.
- Increased the duration that the monthly mortgage insurance is required.
In the past, mortgage insurance on many FHA loans would be cancelled after five years and/or 78% equity threshold. Now, mortgage insurance is required to run either 11 years or the entirety of the loan term.
Borrowers must reach the equity thresholds (78%) by way of payment. In other words, borrowers can’t rely on an increase in equity due to market movement.
The fees can get very expensive in either fee structure (old or new). Consider, a standard FHA monthly mortgage insurance fee charges 1.25% of the loan amount. This brings your monthly interest rate up from (say) 4.25% to 5.50%.
Click here to read about the FHA mortgage insurance structure.
Mortgage insurance is required on conventional loans for down payments under 20%. Unlike with the FHA loan, there is no minimum term – when a borrow reaches the 78% threshold, the mortgage insurance is dropped.
Also unlike the FHA loan, home value appreciation counts towards increased equity. If the market is improving and your home is suddenly worth more, these gains can count towards your equity threshold.
Here is another trick: mortgage insurance is dropped at 78% by law, but if borrowers catch it early – after 80% – they can make additional savings.