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If you were a first-time home buyer, had less-than-ideal credit, or owed a lot of debt while home shopping, you may have chosen an FHA loan rather than a regular conventional mortgage. While this type of mortgage insured by the Federal Housing Administration has made homeownership possible for many Americans, it comes with mortgage insurance premiums that can be difficult to remove.
Here’s everything homeowners need to know about how to get rid of FHA mortgage insurance and whether doing so is a good idea.
Read more: What are the pros and cons of FHA loans?
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An FHA mortgage insurance premium (MIP) is a type of mortgage insurance paid on FHA loans, and it protects FHA-approved lenders against losses if you fail to make your monthly payments. FHA mortgage insurance aims to encourage lenders to offer mortgages to borrowers with less-than-perfect credit scores or smaller down payments by reducing the risk they face in case of borrower default.
Once you’re approved for an FHA loan, you’ll pay two types of FHA mortgage insurance premiums: an up-front premium paid at closing and annual premiums.
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Up-front MIP: 1.75% of your total loan amount
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Annual MIP: Varies depending on the term, size, and loan-to-value (LTV) ratio of your home loan
The up-front premium is paid at closing, while the annual premium is paid as part of your monthly mortgage payment.
Learn more: What does PITI mean, and how does it affect your mortgage?
Paying the mandatory FHA mortgage insurance is one of the biggest drawbacks for homeowners with FHA loans. Here’s a step-by-step guide on FHA mortgage insurance removal if you’re on a tight budget and eager to shed this financial burden.
You could eliminate your FHA mortgage insurance premium without refinancing, but only if one of these two scenarios applies to you:
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Your loan origination date was between Jan. 1, 2001, and June 2, 2013. In this case, your MIP will be canceled when you reach a loan-to-value ratio of 78%, or have 22% equity in your home.
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Your loan origination date was June 3, 2013, or later, and you made a down payment of at least 10%. In this case, your MIP will be canceled after 11 years. (For down payments of less than 10%, you’ll pay mortgage insurance for the life of the loan, unless you refinance.)
You can remove FHA mortgage insurance with one of two methods: automatic MIP cancellation or refinancing your FHA loan.
MIP cancellation
If you meet the eligibility requirements mentioned earlier, your mortgage servicer or lender should automatically cancel your MIP, assuming your loan is in good standing. If your mortgage lender or servicer fails to cancel your MIP even though you’ve met the criteria, contact them directly for more information.
Refinancing
If you don’t meet the conditions to cancel your MIP while keeping your FHA loan intact, you can apply to refinance your FHA loan into another type of mortgage loan to eliminate your MIP, assuming you qualify and can get a lower mortgage rate.
To qualify for a refinance with most mortgage lenders, you’ll typically need a 620 credit score and around 20% equity in your home. If you’ve built up enough home equity, refinancing from an FHA loan to a new conventional loan would eliminate MIP payments. With 20% equity, you also wouldn’t have to pay for private mortgage insurance (PMI) on the conventional loan.
Learn more: FHA cash-out refinance — Requirements and guidelines
If you can’t qualify for MIP cancellation or refinancing and are struggling to keep up with your FHA mortgage payments, contact your FHA lender. They can discuss potential solutions with you.
When you take out an FHA loan, you must pay an up-front mortgage insurance premium worth 1.75% of the original mortgage principal at closing, plus an annual MIP. The cost of your annual MIP will vary depending on your mortgage size, term length, and loan-to-value ratio.
Let’s say you borrow $150,000 to purchase your home. In this case, you’ll pay an up-front mortgage insurance premium of $3,500 at closing and annual MIPs of anywhere from 0.45% to 1.05% of the total mortgage — around $675 to $1,575 each year.
Learn more: What are the FHA loan requirements?
The most noticeable impact of removing your FHA mortgage insurance is you’ll have a lower monthly mortgage payment. With this extra room in your budget, you could put more toward building an emergency fund or beefing up your retirement savings. You could also put those savings back into your home and aggressively pay down the principal on your mortgage.
There are two instances that will automatically eliminate FHA mortgage insurance from your loan: If your loan origination date was between Jan. 1, 2001, and June 2, 2013, your FHA MIP will be canceled when you reach an LTV ratio of 78%. And if your loan origination date was after June 2, 2013, and you made a down payment of at least 10%, your MIP will be automatically eliminated after 11 years. However, if you made a down payment of less than 10%, you’ll pay MIPs for the life of the loan, unless you refinance.
Should you refinance into a new loan to cancel FHA MIP? If you’re thinking about refinancing just to remove FHA mortgage insurance from your home loan, remember that you may still need to pay mortgage insurance on the new one. For example, if you refinance into a conventional loan, you must pay private mortgage insurance if your loan-to-value ratio is less than 80%. Depending on your situation, you could end up paying more for PMI than your FHA MIP.
So, before refinancing, consider the current refinance rates, FHA loan closing costs, and other associated expenses to determine whether you’ll actually end up saving money in the long run.
What is the difference between MIP and PMI?
Mortgage insurance premium (MIP) and private mortgage insurance (PMI) are both insurance policies that protect lenders in case you default on your mortgage loans. The main difference between the two is that PMI applies to conventional loans with less than 20% down payments, while MIP is administered by the Federal Housing Administration and applies specifically to FHA loans.
It depends. If you take out a conventional loan but put down less than 20%, lenders will typically require you to pay private mortgage insurance to mitigate their risk in case you default on the loan. However, once you’ve built up enough equity in your home — usually when the loan-to-value ratio reaches 80% — you can request for the PMI to be canceled. For FHA loans, mortgage insurance is mandatory regardless of your down payment amount.
If you don’t qualify to remove FHA MIP or refinance into a conventional loan, you could possibly reduce your MIP with an FHA Streamline Refinance. This program allows you to refinance your FHA loan into a new FHA loan so you can save money. You’ll probably still have to pay MIP, but it could be more affordable than with your original mortgage. Check with your lender for more details on how to get started.
This article was edited by Laura Grace Tarpley