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Dear Dr. Don,
I got an FHA home loan earlier this year. Since then, the value of land and house has risen to the point where my equity stake is over 25 percent. I've been told that because it is a manufactured home and an FHA loan, I will have to be in the loan for five years before I can even consider dropping the private mortgage insurance. Is that true?
-- Edgar Equity
 Dear
Edgar,
The Federal Housing Administration provides a loan guarantee program in lieu of PMI that helps qualified borrowers get a mortgage loan with a low down payment.
A mortgage insurance premium is the FHA equivalent of PMI. In most 15- or 30-year FHA loans, the borrower pays 1.5 percent of the loan amount at closing as an upfront insurance premium, along with a 0.5 percent annual renewal premium paid monthly over the life of the loan. If you were not charged an upfront premium on your loan, you'll pay this annual premium.
However, there is a way to cancel this premium. Since your FHA mortgage was originated after Jan. 1, 2001, and you have an upfront insurance premium, the annual premium is canceled when either your equity reaches a 78 percent loan-to-value ratio, or five years elapse, whichever takes longer to occur.
Another way to cancel the mortgage insurance premium is to consider refinancing with conventional financing, if
it's available. However, the prospect of refinancing can be a little dicey with manufactured housing.
See the Bankrate feature "Financing a manufactured home" to learn
why it's a problem.
Refinancing gets you out of the annual renewal premium, but it won't generate a partial refund of any upfront premium paid. That's because for FHA-insured loans endorsed on or after Dec. 8, 2004, no refund is due homeowners unless they refinanced to a new FHA-insured loan. In addition, no refund is due these homeowners after the third year of insurance.
In other words, any refund of the upfront premium on your current mortgage would have to go toward the upfront premium on your new FHA mortgage. Since you contend that you no longer need the insurance, you don't want another insured FHA mortgage.
Odds are that you're better off staying in your existing loan and waiting for the five years to pass rather than chasing down conventional financing.
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