Unlike conventional loans, FHA loans come with mandatory mortgage insurance regardless of the amount of your down payment, and cancelling it can be challenging, and in some cases, impossible. Here’s how to do it if you’re eligible.
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 817,000 other FHA loan borrowers last year, helps cover the cost of that insurance.
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 (LTV)
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.
- More than likely, you’re paying an annual MIP of 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.
Conventional PMI vs. FHA MIP
FHA loan borrowers aren’t the only borrowers who have to pay mortgage insurance. Borrowers with a conventional loan who made a down payment of less than 20 percent typically have to pay private mortgage insurance (PMI) premiums, which currently range from 0.58 percent to 1.86 percent of the loan principal.
Getting rid of PMI is fairly straightforward: Once you accrue 20 percent equity in your home, either by making payments to reach that level or by increasing your home’s value, you can request to have PMI removed. (Once you accrue 22 percent equity in your home, your lender automatically stops charging for the insurance.)
Can you cancel FHA MIP?
“There are a number of factors that come into play when determining whether or not the FHA mortgage insurance can be cancelled,” 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 cancelled once you reach an LTV ratio of 78 percent.
- June 3, 2013-present: Your MIP will only be cancelled once your mortgage is paid in full, unless you made a down payment of at least 10 percent. If so, your MIP will be cancelled after 11 years.
How to get rid of FHA MIP
If you want to stop paying mortgage insurance on your FHA loan, contact your lender to see if you have the ability to remove it. The dates above play a key role in any type of flexibility in your loan terms.
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.