Unlike conventional loans, FHA loans come with mandatory mortgage insurance regardless of the amount of your down payment, and canceling it can be challenging, and in some cases, impossible. Here’s how to get rid of MIP on an FHA loan if you’re eligible.
When can you drop MIP on an FHA loan?
“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.”
The first place to look is your loan origination date:
- July 1991-December 2000: If your origination date falls between these two markers, you can’t cancel your FHA mortgage insurance premiums.
- January 2001-June 3, 2013: Your MIP will be canceled once you reach a loan-to-value ratio (LTV) of 78 percent.
- June 3, 2013-present: Your MIP will only be canceled once your mortgage is paid in full, unless you made a down payment of at least 10 percent. If so, your MIP will be canceled after 11 years.
How to remove MIP from an FHA loan
If you want to stop paying mortgage insurance on your FHA loan, 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 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 consider 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 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 remodeling project?
- 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.
Frequently asked questions about FHA MIP removal
What is an FHA mortgage insurance premium (MIP)?
FHA mortgage insurance protects against the risk that you default, or stop making payments, on your FHA loan. The Federal Housing Administration (FHA) insures your FHA loan in the event that this happens and you wind up being unable to pay it back. Your FHA mortgage insurance premium (MIP), along with the premiums paid by more than 846,000 other FHA loan borrowers last year, helps cover the cost of that insurance.
How much does MIP cost?
You already paid one portion of the MIP when you closed on your home — that was your upfront insurance. The upfront MIP equals 1.75 percent of the amount you borrowed, and was likely bundled into your loan and all those papers you signed before you got the keys to your home.
The second portion of the MIP is the part you’re paying now, your annual MIP, which varies based on individual loan terms. Annual MIP rates depend on three key factors:
- The total amount of your loan
- The length of time you agreed to pay it back
- The loan-to-value ratio
Based on these factors, you’ll pay between 0.45 percent and 1.05 percent of the loan principal for your annual MIP.
- The 0.45 percent rate applies if you have a 15-year loan and more than 10 percent equity in your home.
- The 1.05 percent rate applies if you have a loan term longer than 15 years, and the amount you borrowed exceeded $625,500.
- A typical annual MIP is 0.85 percent, which is the rate that applies to borrowers who put down less than 5 percent on a 30-year FHA loan for $625,500 or less.