How to get rid of mortgage insurance on an FHA loan
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If you have an FHA loan, you might be wondering how to get rid of the mortgage insurance premium (MIP) you’re paying each month.
Unlike on conventional loans (which only impose private mortgage insurance when down payments are under 20 percent), FHA loans come with mandatory mortgage insurance premiums regardless of the amount of your down payment, and canceling them can be challenging. But not impossible. Here’s how to get rid of MIP on an FHA loan (and when you can’t).
How to remove MIP from an FHA loan
Removing FHA mortgage insurance automatically
“There are a number of factors that come into play when determining whether or not the FHA mortgage insurance can be canceled,” explains Alan Aldinger, vice president of media relations for PNC Bank. “The biggest factor is when the case number was assigned for a borrower’s current FHA loan.”
In other words, you may be eligible for automatic MIP removal depending on when you received your loan, along with how much of it you’ve paid off and how much of a down payment you made.
- If your origination date is between July 1991 and December 2000, you cannot cancel your FHA mortgage insurance premiums. You’ll need to keep paying it for the life of the loan or refinance into a new loan.
- If you received your loan between January 2001 and June 3, 2013, your MIP will be automatically canceled when you reach a loan-to-value ratio (LTV) of 78 percent.
- If your loan originated after June 3, 2013 and you made a down payment of at least 10 percent, your MIP will be canceled after 11 years. For down payments of less than 10 percent, you’ll have MIP until your mortgage is paid in full.
How to remove MIP from an FHA loan
Start by finding out which rules apply to you by looking at your loan origination date. Then contact your lender to see if you’re eligible for FHA MIP removal. The dates above play a key role in any type of flexibility in your loan terms and, consequently, help you determine how to remove MIP from FHA loan.
Unfortunately, you won’t have much leverage in terms of FHA mortgage insurance removal if your loan-to-value ratio (LTV) is higher than 78 percent (for loans originating between January 2001 and June 3, 2013) or if you put less than 10 percent down (for loans originating after June 3, 2013).
However, there are other options to consider – including refinancing to a conventional loan.
Refinancing to remove FHA MIP
If your lender determines that the MIP can’t be eliminated, it’s time to think about whether you should refinance your FHA loan to a conventional loan. Here are a few key considerations to make before refinancing:
- Credit score – What does your credit look like now versus what it looked like when you took out your FHA loan? If you’ve made good strides, you might qualify for a conventional loan with a better rate, and no private mortgage insurance (PMI) if your LTV is 80 percent or less.
- LTV ratio – In addition to how much you’ve paid on your existing FHA loan, the value of your home is critical. Is the home worth more today due to rising property values or a major renovation you did on it?
- Closing costs – Refinancing isn’t free. You’ll need to pay closing costs on the new loan, which can add up to thousands of dollars. While it will feel good to be rid of annual MIP, make sure that refinancing will also save you a good chunk of money and be worth it in the long run. Bankrate’s mortgage refinance calculator can help you decide.
Should you remove MIP from an FHA loan?
If you’re eligible to remove MIP from FHA loan after gaining enough equity in your home, it probably makes sense to do so. Simply put, it’s one less payment you’ll have to make. With that said, you shouldn’t overextend yourself financially to get there.
However, if you’re considering refinancing just to remove MIP, there are a few more things to consider. For one, depending on your equity level, you may still need to pay mortgage insurance. With a conventional loan, that’s known as PMI – and it may be pricier than your MIP premium. You’ll also need to go through the loan process again, including paying closing costs.
On the plus side, refinancing can reduce your monthly mortgage payments, and that may make up for the higher premiums. Plus, PMI is easier to get rid of. You can request to cancel your PMI on a conventional loan after you reach 20 percent equity, or an 80 percent LTV in your home – which could be a major advantage, depending on when you received your FHA loan and how much you put down.
Keep in mind: The Homeowners Protection Act of 1998 dictates that your mortgage lender or servicer must automatically terminate PMI when your loan-to-value (LTV) ratio drops to 78 percent — in other words, when your mortgage balance equals 78 percent of the purchase price of your house.
Final word on getting rid of FHA mortgage insurance
Getting rid of MIP can be a financial relief, but the requirements to remove it are fairly rigid. If you want to know whether you qualify for MIP removal, reach out to your lender. Otherwise, you may be able to refinance to a conventional loan to eliminate MIP, but make sure to run the numbers before exploring that option.
Frequently asked questions about FHA MIP removal
FHA mortgage insurance premiums (MIP) are an extra fee that’s added to your mortgage to reduce the risk that you default, or stop making payments, on your FHA loan. There are two components of MIP: an upfront portion (paid once at closing) and an annual portion (paid yearly).
The upfront portion of MIP equals 1.75 percent of the amount borrowed and is paid when you close on your home. Your annual MIP rate depends on a few factors, including the total amount and terms of your loan, but ranges between 0.45 percent and 1.05 percent of the loan principal.
Both MIP and PMI are types of mortgage insurance, but MIP is specific to FHA loans, and PMI is for conventional loans. All FHA loan recipients are required to have mortgage insurance, but conventional loan borrowers only need to have insurance if they made a down payment of less than 20 percent.
Additional reporting by Taylor Freitas