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If you’re buying a home and have a down payment of less than 20%, you may have to pay for private mortgage insurance (PMI) or a mortgage insurance premium (MIP). This insurance does represent an additional charge you must pay for part or all of the life of the loan, but it can unlock homeownership for you.

Private mortgage insurance may be required for conventional home loans, those not backed by the government. Mortgage insurance premium is always a part of FHA-insured loans, at least for a number of years.

Each is intended to protect lenders against losses if borrowers default. Here’s a guide to how they work, how they differ, how much they cost, and when they can possibly be dropped.

What Is Mortgage Insurance Premium?

Borrowers pay MIP if they’re securing a loan backed by the Federal Housing Administration, no matter the down payment amount or loan term.

MIP runs for the loan’s full term or 11 years. There’s a one-time upfront premium of 1.75% of the base loan amount, which can be rolled into the loan, and an annual premium divided by 12 that is part of the monthly mortgage payment.

A key reason people choose FHA loans is the ability to put down as little as 3.5%.

Additionally, if your heart pounds with excitement when you think about buying a fixer-upper and making it beautiful and functional again, FHA offers the FHA 203(k) home loan for that — something that many lenders won’t do, especially if the home isn’t in good enough shape to be lived in.

With an FHA 203(k) loan, a single source of funding, the interest rate may be slightly higher than other mortgage rates, and the loan can require more coordination. It makes sense to choose contractors to rehab the home who are familiar with the program’s requirements.

Recommended: Different Types of Mortgage Loans, Explained

How Much Is MIP on an FHA Loan?

The ongoing annual MIP of 0.45% to 1.05% is divided by 12 and added to your monthly mortgage payment. What you’ll pay depends on your loan-to-value (LTV) ratio (think: down payment) and length of the loan.

Taking out an FHA loan for the common 30 years, or anything greater than 15 years, will result in the following rates for 2023 (measured in basis points, or bps):

Here’s an example: Let’s say you borrow less than or equal to $726,200 and have a down payment of 5% or less. You’ll pay an annual MIP of 0.50%. On a home loan of $300,000, that’s $1,500 per year, or $125 per month. (0.0050 x 300,000 = 1,500, divided by 12.)

Some homeowners can pay off their loans quicker so they choose a shorter term, such as 15 years. As a result, they can take advantage of lower MIP, like this:

So if you were to borrow less than or equal to $625,500 and put down 10% or less, you’d pay an annual MIP of 0.15%. On a $300,000 home loan, that’s $450 a year, or $37.50 a month.

💡 Quick Tip: SoFi Home Loans are available with flexible term options and down payments as low as 3%.*

Can You Get Rid of MIP?

Maybe.

If you took out an FHA loan before June 3, 2013, you may be able to cancel MIP if you have 22% equity in your home and have made all payments on time. (FHA lenders do not automatically cancel your MIP once you reach that home equity threshold. You’ll need to ask.)

If you purchased or refinanced a home with an FHA loan on or after June 3, 2013, and your down payment was less than 10%, MIP will last for the entire loan term.

If you put down 10% or more, you’ll pay MIP for 11 years.

Here’s a chart that sums it up. For loans with FHA case numbers assigned on or after June 3, 2013, FHA will collect the annual MIP as follows:

One way to get rid of MIP is to refinance the FHA loan into a conventional loan with a private lender. Many FHA homeowners have enough equity to refi into a conventional loan and give mortgage insurance the heave-ho.

What Is Private Mortgage Insurance?

PMI is typically required when you’re putting less than 20% down on a conventional conforming loan. Most conventional mortgages are “conforming,” which means they meet the requirements to be sold to Fannie Mae or Freddie Mac.

One kind of nonconforming loan, the jumbo loan, which starts at over half a million for a single-family home, does not always require PMI.

Usually, homeowners choose to pay PMI monthly, rather than annually, and it is included in monthly mortgage payments. A few may opt for lender-paid mortgage insurance, but for that convenience a homebuyer will usually pay a slightly higher interest rate.

Although PMI adds costs, it can allow you to qualify for a loan that you otherwise might not. And it can help you to buy a house without putting 20% down.

How Much Does PMI Cost?

PMI varies but often is 0.5% to 2% of the total loan amount annually. The premium amount depends on the type of mortgage you get, LTV, your credit score, and more. It also depends on the amount of PMI that your loan program or lender requires.

According to an Urban Institute report, PMI may be more economical than FHA loans for borrowers with a FICO score of 720 or above and who put 3.5% down.

When Can You Stop Paying PMI?

Buying a home may require you to pay a PMI premium, but there are four methods available to stop paying it.

First, there is a legal end to PMI. Under the Homeowners Protection Act, also known as the PMI Cancellation Act, your lender is required to cancel PMI automatically once your mortgage balance is at 78% of the home’s original value. “Original value” generally means either the contract sales price or the appraised value of your home at the time you purchased it, whichever is lower (or, if you have refinanced, the appraised value at the time you refinanced). Which figure is used for the original value can vary by state.

Second, you can reappraise your home, which will likely result in a new value. Thus, you can ask your servicer to cancel PMI based on your built equity and the current value. Owners of homes that appreciated, either over time or thanks to home improvements, may benefit from this. You may need to be proactive with your lender and meet specific eligibility requirements to help make that happen.

Third, you may be able to refinance your mortgage. If you have at least 20% equity, you can possibly qualify for a conventional loan without the need for PMI.

Finally, the Consumer Financial Protection Bureau notes another way in which PMI can be canceled: If you’re current on your payments and you’ve reached the halfway point of the loan’s schedule, even if your mortgage balance hasn’t yet reached 78% of the home’s original value.

💡 Quick Tip: A major home purchase may mean a jumbo loan, but it doesn’t have to mean a jumbo down payment. Apply for a jumbo mortgage with SoFi, and you could put as little as 10% down.

What About Refinancing?

If you have a mortgage that includes PMI or MIP and your property value has increased significantly, one option to consider is refinancing.

Some borrowers may find that they are now able to qualify for a conventional home loan without mortgage insurance.

Refinancing holds appeal because of the possibility of locking in a better rate and reducing your monthly payment. Equity-rich homeowners sometimes like a cash-out refinance.

But as with your original mortgage, you’ll face closing costs if you refinance.

What about a “no cost refinance” you might see advertised? You’ll either add the closing costs to the principal or get an increased interest rate.

The Takeaway

Glass half-full: Private mortgage insurance and mortgage insurance premium open the door to homeownership to many who otherwise could not buy a property. Glass half-empty: PMI and MIP can really add up.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility for more information.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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Reasons for paying off your mortgage early include eliminating monthly mortgage payments, saving money in interest, reducing financial stress, and more. But, just because you can pay your mortgage off early doesn’t necessarily mean you should.

Should You Consider an Early Mortgage Payoff?

It can be tempting to rush to pay off your home loan when you have the ability to, especially if you’ve struggled with debt management. And why wouldn’t you want to pay off your mortgage? Getting rid of debt could potentially increase cash flow.

When it comes to your mortgage loan, paying it off early depends on your unique financial situation and goals — there is no one right answer.

Reasons Not to Pay Your Mortgage Off Early

While it may seem like there are no reasons not to pay off your mortgage early, that is actually not the case. Here are a few reasons why it may not be a good idea to pay off your mortgage loan early:

You Have a Competitive Interest Rate

Unless you’ve reached all of your financial goals, it may not make the most sense to pay off your mortgage early when you have a competitive interest rate.

For example, if you are saving to send your child to college or you’re trying to rebuild your emergency fund after a home repair, those might take priority.

You also could possibly earn more by investing your money as opposed to paying off your loan. If that’s the case, it doesn’t make sense to pay off your mortgage early unless you’re wanting the peace of mind that comes with no mortgage debt. Investment decisions should be based on specific financial needs, goals, and risk appetite.

You Would Have Nothing Left in Savings

If you only have enough in the bank to cover your mortgage, it is not advisable to pay it off. Having an emergency fund is necessary and may take priority over having no mortgage payment.

You Might Face a Prepayment Penalty

Make sure to review your mortgage terms closely. Some lenders charge an early payoff penalty, usually a percentage of the principal balance at the time of payoff.

You Might Miss Out on the Mortgage Tax Deduction

For many people who itemize, having a mortgage helps push their itemized deductions higher than the standard deduction. It’s worth discussing the mortgage tax deduction with your accountant or other tax professional before you resolve to pay your mortgage off early.

You Have Other High-interest Debt

If you have other high-interest debt, such as credit card debt, personal loans, or student loans, it may make sense to pay those off in full prior to paying your mortgage off early. Home loans typically have the lowest interest rates of other forms of debt and are considered “good debt” by lenders. It only makes sense to pay off your mortgage early if you have no other debts in your name.

When an Early Payoff May Make Sense

On the flip side, there are some situations when paying off a mortgage early might make more sense than waiting. Reasons to pay off your mortgage early may include:

You’ve Met All of Your Financial Goals

If your emergency savings account is right where you feel it needs to be and you’re diligently contributing to your retirement accounts, there may be no reason not to pay off your mortgage early.

Another idea, however, is to purchase an investment property instead of paying off your mortgage early. This can create a monthly cash flow in addition to the value of the property (hopefully) appreciating over the years.

You’re Interested in Being 100% Debt-Free

Sometimes, just the idea of having loan payments can be mentally taxing, even if you’re in a good place financially. Money is not just about numbers for many; it’s also about emotions.

If paying off your mortgage loan early relieves anxiety because it’s helping you become debt-free, then that might be something to consider.

Of course, reflecting on why you want to become debt-free is important when thinking about paying your mortgage off. If, for example, it’s because you’re approaching retirement and will no longer be getting a steady paycheck, it might make sense to pay off your mortgage.

Recommended: How to Pay Off a 30-Year Mortgage in 15 Years

Ways to Pay Off a Mortgage Early or Faster

If you’ve decided it makes sense for your financial situation to pay off your mortgage early, here’s how you can do it:

Lump sum. The easiest way to pay off your mortgage early is by making one lump-sum payment to your mortgage lender. Contact your lender prior to making the payment so you can make sure you’re paying exactly what you owe, including any possible prepayment fees.

Extra payments. You could potentially pay more toward your mortgage principal each month if you got a raise at work or you’ve trimmed some fat in your budget.

If you make extra payments toward your mortgage, it could lead to paying off the loan faster than if you were just to make the set payment each month. Make sure to contact your lender prior to making extra payments, though, so you know the extra amount is being applied toward the principal amount only, not the principal and interest.

Refinancing. Another option for paying off your mortgage early is refinancing. Refinancing your mortgage means replacing your current mortgage with a new one, ideally with a better rate and term.

If you shorten your loan term from 30 years to 15 years, for example, it may increase your monthly payments but in turn allow you to pay your mortgage off faster. Home loans with shorter terms often come with lower interest rates, too, so more of your monthly payments will be applied to the loan’s principal balance.

The Takeaway

Should you pay off your mortgage early? Maybe. If your retirement fund is fully-funded, you have no other high-interest debts, and you’re interested in becoming 100% debt-free, it may make sense to pay off your mortgage early. However, if you do not have a fully funded retirement and emergency savings account or you could make more money by investing rather than paying off your mortgage debt, it could be best to hold off on paying your mortgage off early.

One way to save on interest and possibly pay off your mortgage early is by refinancing. Refinancing can allow you to lower your interest rate and shorten your loan term, if desired.

SoFi offers competitive mortgage refinance rates and flexible loan terms. Checking your rate takes just a few minutes and will not impact your credit score.*

*Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility for more information.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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If you are planning on applying for a home loan or for a mortgage refinance, you are likely going to want to know your loan-to-value (LTV) ratio. This is calculated by dividing the loan principal by the value of the property. It’s an important metric when getting a mortgage approved because it reflects how much of the property’s value you are borrowing. A higher number may be seen as a riskier proposition by prospective lenders.

Here, you’ll learn the ins and outs of calculating LTV, why it matters, and how it can have a financial impact over the life of a loan.

LTV, a Pertinent Percentage

The relationship between the loan amount and the value of the asset securing that loan constitutes LTV.

To find the loan-to-value ratio, divide the loan amount (aka the loan principal) by the value of the property.

LTV = (Loan Value / Property Value) x 100

Here’s an example: Say you want to buy a $200,000 home. You have $20,000 set aside as a down payment and need to take out a $180,000 mortgage. So here’s what your LTV calculation looks like:

180,000 / 200,000 = 0.9 or 90%

Here’s another example: You want to refinance your mortgage (which means getting a new home loan, hopefully at a lower interest rate). Your home is valued at $350,000, and your mortgage balance is $220,000.

220,000 / 350,000 = 0.628 or 63%

As the LTV percentage increases, the risk to the lender increases.

Why Does LTV Matter?

Two major components of a mortgage loan can be affected by LTV: the interest rate and private mortgage insurance (PMI).

Interest Rate

LTV, in conjunction with your income, financial history, and credit score, is a major factor in determining how much a loan will cost.

When a lender writes a loan that is close to the value of the property, the perceived risk of default is higher because the borrower has little equity built up and therefore little to lose.

Should the property go into foreclosure, the lender may be unable to recoup the money it lent. Because of this, lenders prefer borrowers with lower LTVs and will often reward them with better interest rates.

Though a 20% down payment is not essential for loan approval, someone with an 80% LTV or lower is likely to get a more competitive rate than a similar borrower with a 90% LTV.

The same goes for a refinance or home equity line of credit: If you have 20% equity in your home, or at least 80% LTV, you’re more likely to get a better rate.

If you’ve ever run the numbers on mortgage loans, you know that a rate difference of 1% could amount to thousands of dollars paid in interest over the life of the loan.

Let’s look at an example, where two people are applying for loans on identical $300,000 properties.

Person One, Barb:

•  Puts 20%, or $60,000, down, so their LTV is 80%. (240,000 / 300,000 = 80%)

•  Gets approved for a 4.5% interest rate on a 30-year fixed-rate mortgage

•  Will pay $197,778 in interest over the life of the loan

Person Two, Bill:

•  Puts 10%, or $30,000, down, so their LTV is 90%. (270,000 / 300,000 = 90%)

•  Gets approved for a 5.5% interest rate on a 30-year fixed-rate mortgage

•  Will pay $281,891 in interest over the life of the loan

Bill will pay $84,113 more in interest than Barb, though it is true that Bill also has a larger loan and pays more in interest because of that.

So let’s compare apples to apples: Let’s assume that Bill is also putting $60,000 down and taking out a $240,000 loan, but that loan interest rate remains at 5.5%. Now, Bill pays $250,571 in interest;

The 1% difference in interest rates means Bill will pay nearly $53,000 more over the life of the loan than Barb will. (It’s worth noting that there are costs when you refinance a mortgage; it’s a new loan, with closing expenses.)

💡 Quick Tip: You deserve a more zen mortgage loan. When you buy a home, SoFi offers a guarantee that your loan will close on time. Backed by a $5,000 credit.‡

PMI or Private Mortgage Insurance

Your LTV ratio also determines whether you’ll be required to pay for private mortgage insurance, or PMI. PMI helps protect your lender in the event that your house is foreclosed on and the lender assumes a loss in the process.

Your lender will charge you for PMI until your LTV reaches 78% (by law, if payments are current) or 80% (by request).

PMI can be a substantial added cost, typically ranging anywhere from 0.1% to 2% of the value of the loan per year. Using our example from above, a $270,000 loan at 5.5% with a 1% PMI rate translates to $225 per month for PMI, or about $18,800 in PMI paid until 20% equity is reached.

Recommended: Understanding the Different Types of Mortgage Loans

How Does LTV Change?

LTV changes when either the value of the property or the value of the loan changes.

If you’re a homeowner, the value of your property fluctuates with evolving market pressures. If you thought the value of your property increased significantly since your last home appraisal, you could have another appraisal done to document this. You could also potentially increase your home value through remodels or additions.

The balance of your loan should decrease over time as you make monthly mortgage payments, and this will lower your LTV. If you made a large payment toward your mortgage, that would significantly lower your LTV.

Whether through an increase in your property value or by reducing the loan, decreasing your LTV provides you with at least two possible money-saving options: the removal of PMI and/or refinancing to a lower rate.

💡 Quick Tip: Generally, the lower your debt-to-income ratio, the better loan terms you’ll be offered. One way to improve your ratio is to increase your income (hello, side hustle!). Another way is to consolidate your debt and lower your monthly debt payments.

The Takeaway

The loan-to-value ratio affects two big components of a mortgage loan: the interest rate and private mortgage insurance. A lower LTV percentage typically translates into more borrower benefits and less money spent over the life of the loan.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

^‡SoFi On-Time Close Guarantee: If all conditions of the Guarantee are met, and your loan does not close on or before the closing date on your purchase contract accepted by SoFi, and the delay is due to SoFi, SoFi will give you a credit toward closing costs or additional expenses caused by the delay in closing of up to $10,000.^ The following terms and conditions apply. This Guarantee is available only for loan applications submitted after 04/01/2024. Please discuss terms of this Guarantee with your loan officer. The mortgage must be a purchase transaction that is approved and funded by SoFi. This Guarantee does not apply to loans to purchase bank-owned properties or short-sale transactions. To qualify for the Guarantee, you must: (1) Sign up for access to SoFi’s online portal and upload all requested documents, (2) Submit documents requested by SoFi within 5 business days of the initial request and all additional doc requests within 2 business days (3) Submit an executed purchase contract on an eligible property with the closing date at least 25 calendar days from the receipt of executed Intent to Proceed and receipt of credit card deposit for an appraisal (30 days for VA loans; 40 days for Jumbo loans), (4) Lock your loan rate and satisfy all loan requirements and conditions at least 5 business days prior to your closing date as confirmed with your loan officer, and (5) Pay for and schedule an appraisal within 48 hours of the appraiser first contacting you by phone or email. This Guarantee will not be paid if any delays to closing are attributable to: a) the borrower(s), a third party, the seller or any other factors outside of SoFi control; b) if the information provided by the borrower(s) on the loan application could not be verified or was inaccurate or insufficient; c) attempting to fulfill federal/state regulatory requirements and/or agency guidelines; d) or the closing date is missed due to acts of God outside the control of SoFi. SoFi may change or terminate this offer at any time without notice to you. *To redeem the Guarantee if conditions met, see documentation provided by loan officer.
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility for more information.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.