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Dr. Don Taylor, CFA, Bankrate.com advice columnistCanceling FHA mortgage insurance

Dear Dr. Don,
I was told by my bank that they could not remove the PMI from my loan because it is an FHA loan, which they bought. I was also told that what I was paying, $198 per month, was high and I should just refinance at a higher rate. Is this true?
-- Tamara Tedious

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Dear Tamara,
FHA loans don't have private mortgage insurance, or PMI. Instead they carry a government guarantee. Borrowers pay for that guarantee in one of two ways: they pay a mortgage insurance premium, or MIP, at closing and/or they pay a monthly mortgage insurance premium along with their mortgage payments.

That fixed rate applies to all Series I savings bonds issued in the six months following the rate determination. The table below is from the TreasuryDirect Web site and shows the fixed-rate announcements since the Series I savings bonds were first issued in September of 1998.

For loans that closed after Jan. 1, 2001, if the borrower paid an upfront premium the monthly MIP will fall off after the loan reaches 78 percent loan-to-value, based on the initial purchase price/appraised value of the home and the principal payments made against the mortgage loan -- with a good payment history. HUD form 92900-b refers to FHA mortgage insurance.

HUD says:

So, if you didn't pay an upfront mortgage insurance premium, the lender is right and you can't get out from under the MIP while you're in the loan. Refinancing is an option, especially if your home's value has appreciated enough to allow you to carry conventional financing with no PMI. A HUD FAQ page has additional information on canceling mortgage insurance on an FHA loan.

Getting out from under a $200 per month expense might justify a refinancing, even at a higher interest rate, but exchanging MIP for PMI doesn't make much sense. After you take a look at a PMI calculator, take a look at Bankrate's refinancing calculator to see if it makes sense for you. In general, the longer you expect to be in the house, the easier it is to justify refinancing.

If you still have to pay mortgage insurance, but are considering refinancing anyway, you should try to put it off until after Jan. 1. Under a new law that goes into effect then, you may be able to deduct mortgage insurance -- either PMI or the kind the FHA charges -- from your taxes. See the Bankrate feature "New tax deduction created for mortgage insurance" for the details.

To ask a question of Dr. Don, go to the "Ask the Experts" page and select one of these topics: "financing a home," "saving & investing" or "money."

Bankrate.com's corrections policy -- Posted: Dec. 19, 2006
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