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.

In this article (Skip to…)

• About mortgage insurance
• MI removal letters
• Remove FHA MIP
• What is the FHA-SR?
• PMI cancellation
• Your next steps

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).

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.

Check your refinance eligibility today (Jul 14th, 2021)

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.

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.

Verify your new rate (Jul 14th, 2021)