FHA loans are popular for a good reason. They help home buyers especially first-time home buyers — get competitive mortgage rates even if they have lower credit scores or higher monthly debts.
But this loan program has a tradeoff: FHA mortgage insurance premiums (MIP). Someone with a $250,000 FHA loan can expect to pay about $30,000 in mortgage insurance premiums over the life of the loan. Those insurance payments can really add up.
Some FHA borrowers can get rid of their monthly mortgage insurance premiums. Others will need to refinance into another type of loan to eliminate this extra monthly expense. Here are some tips for FHA mortgage insurance removal.
FHA mortgage insurance premium, also known as FHA MIP, helps keep the Federal Housing Administration (FHA) loan program operating.
The FHA is not a mortgage lender; instead, it’s an insurance provider for lenders. When you get an FHA loan, your lender provides the money. The FHA insures the loan.
So if you stopped making payments and the lender had to foreclose, the FHA would step in to help cover the lender’s losses.
With this insurance coverage in force, the lender can approve loans even when the borrower has average credit, a low down payment, and a debt-to-income ratio up to 50 percent.
But it’s the borrower who pays the mortgage insurance premiums (MIP).
Modern FHA mortgage loans charge two types of mortgage insurance premiums:
The FHA charges a different annual insurance rate for some loans, and we’ll explore those details more below. Most borrowers pay the 0.85 percent annual rate.
Paying these premiums can be a good deal: They can save more in interest than they cost in monthly fees. Still, many borrowers want to get rid of this added cost.
The Federal Housing Administration changes its mortgage premium costs and policies from time to time. So how, and whether, you can cancel your FHA MIP will depend a lot on the age of your loan.
The last major change in FHA MIP policies went into effect on June 3, 2013. This means loans that were closed prior to June 3, 2013, have different policies.
If you closed your FHA loan prior to June 3, 2013, you can cancel your loan’s annual MIP payments if:
If you haven’t quite reached the 78% loan-to-value ratio (LTV), keep making regular payments and checking with your loan servicer.
Borrowers who have already hit the magical 78% LTV can potentially start saving hundreds on their monthly payments and keep their existing FHA loan and interest rate intact.
Most home buyers with newer FHA loans will have a harder time canceling their annual MIP payments. That’s because the FHA made annual MIP permanent for many borrowers starting in 2013.
Unless you put at least 10 percent down on your home — much higher than the 3.5 percent minimum down payment required for most borrowers — you’re stuck with annual MIP payments until you pay off the loan.
If you put 10 percent or more down, your MIP will go away after you’ve made payments on your loan for 11 years.
If you put less than 10 percent down, you’ll likely need a mortgage refinance to eliminate these monthly premiums.
If you’ve built up a fair amount of equity in your home, refinancing out of the FHA loan program can eliminate FHA mortgage insurance premiums.
Most homeowners with FHA loans refinance into a conventional loan. Conventional loans do not have insurance from the federal government so borrowers will need stronger credit scores and enough home equity to qualify.
Most conventional lenders require 20 percent home equity for refinance loans. That means your current loan balance can’t exceed 80 percent of your property value. For a home with a value of $300,000, you’d need to pay your loan balance down to $240,000 or lower to refinance.
Rising home values also help you build equity more quickly and since prices have been going up, many homeowners will reach 20% equity faster than they would through regular loan payments alone.
Keep in mind that rising home values also help you build equity more quickly. And since prices have been going up across the nation, many homeowners will reach 20% equity faster than they would through regular loan payments alone. If you think you have enough equity to refinance out of MIP due to rising home values, your lender can check via an appraisal during the refi process.
Refinancing won’t always save money, even if you get rid of FHA MIP. If your new refinance rate exceeds your current rate, for example, you will likely pay more in interest on your new loan than you’re paying in MIP right now.
Be sure you get at least three loan offers to find the lowest possible rate. It’s also important to know that conventional loans require mortgage insurance, too — if you refinance with less than 20 percent equity.
Conventional mortgage loans do not require government mortgage insurance premiums (MIP), but they do require private mortgage insurance, or PMI.
Unless you put 20 percent down — or refinance with at least 20 percent in home equity — your conventional lender will likely require PMI.
PMI will add extra money to your monthly mortgage payment just like the FHA’s annual MIP. PMI may even exceed FHA MIP rates depending on your credit score, debt load, and home equity.
But, unlike with the FHA’s current MIP policies, it’s possible to cancel a conventional mortgage’s PMI.
Once your loan balance falls to 80 percent of the current value of your home, you can request PMI cancellation. PMI should cancel automatically when your loan reaches 78 percent LTV.
Refinancing requires closing costs which could add 5 percent or more to the cost of your new loan. And, with mortgage rates increasing, refinancing could cost even more if you can’t match or beat your current home loan’s rate.
Some FHA loan holders can get rid of their mortgage insurance premiums without refinancing. If you:
But if you put less than 10 percent down on a loan closed on or after June 3, 2013, your MIP will remain for the life of the loan. You’d need a mortgage refinance — or to pay off the loan completely — to stop paying MIP.
When you’re shopping for a mortgage, the FHA loan program’s mortgage insurance premiums may seem like a big downside — especially since annual MIP often lasts for the life of the loan.
But not all borrowers pay the full 0.85 percent annual MIP rate for the life of the loan. By shortening your loan term to 15 years or making a larger down payment, you can reduce your annual MIP rate and term.
For example, if you:
If you borrow more than $625,500, you’ll see higher annual MIP rates. They could go as high as 1.05 percent of your loan balance.
When you can pay 20 percent down on your mortgage loan, the MIP vs PMI question is easy: You’ll save with a conventional loan that requires no PMI payments when you put 20 percent down.
If you’re making a smaller down payment, the question is more complicated. For some borrowers, the FHA’s mortgage insurance premium (MIP) costs less than the private mortgage insurance (PMI) on a conventional loan.
Unlike FHA MIP rates which are set based on your down payment size and loan term, private mortgage insurance rates vary by lender and borrower. Annual PMI rates tend to range from 0.5 to 1.5 percent of the loan amount.
A borrower who barely qualifies for a conventional loan — which often means a credit score around 620 and a down payment of at least 3 percent — may save more money with an FHA loan, despite the loan’s 1.75 percent upfront mortgage insurance premium.
Every borrower is different. To see your actual costs, you’ll need to compare Loan Estimates from a variety of lenders.
The biggest benefit of paying PMI on a conventional loan instead of MIP on an FHA loan is the PMI cancellation policies.
The Homeowners Protection Act of 1998 helps ensure borrowers won’t pay PMI indefinitely.
To get rid of PMI on a conventional loan you can:
There’s another way to eliminate PMI, but it works only for active-duty military members, military veterans, and some surviving spouses of veterans who were killed in the line of duty.
A VA cash-out refinance — which is available only for members of the military community — can help you refinance from a conventional loan into a VA loan and will not require any annual mortgage insurance. The loan does require an upfront funding fee, however. If you ever served in the military and were honorably discharged, you likely have VA loan eligibility.
FHA loans do not charge PMI. Instead, they require MIP, the FHA’s own brand of mortgage insurance premiums. Modern FHA loans require MIP for the entire life of the loan unless you put 10 percent or more down. In that case they go away after 11 years. For FHA loans closed before June 3, 2013, MIP expires after the loan balance reaches 78 percent of the home’s value.
FHA MIP is the Federal Housing Administration’s specific type of mortgage insurance. The FHA charges two types of MIP: An upfront fee that equals 1.75 percent of your loan amount and an annual fee that equals 0.85 percent of the loan amount for 30-year loans with 3.5 percent down.
FHA loans always require MIP. If you put 20 percent down, you’d still pay upfront MIP and annual MIP for at least 11 years. If you put 20 percent down on a conventional loan you shouldn’t need to pay any PMI.
MIP can be removed from some FHA loans. If you put 10 percent or more down, MIP will expire after 11 years. If you closed your FHA loan before June 3, 2013, your MIP will expire once your loan amount falls to 78 percent of your home’s FHA-appraised value.
Most conventional lenders require PMI until the loan’s principal balance falls to 80 percent of the home’s value. If you can reach this threshold in one year, then you can cancel PMI after a year. This isn’t true with FHA loans which require MIP throughout the loan term for most borrowers.
PMI on a conventional loan does not have a set expiration date. Instead, it’s required until you pay the mortgage balance down to 80 percent of the home’s value. You can reach this threshold sooner by making extra payments. An FHA loan’s MIP, which resembles conventional PMI, lasts until you pay off the home — unless you put down 10 percent or more in which case MIP expires after 11 years.
Almost all lenders offer FHA-to-conventional refinances. Conventional loans are the most common loan type for residential real estate.
It is possible to take cash out when refinancing to remove mortgage insurance. Cash out eligibility depends a lot on your home equity. You’d need to leave 20 percent of your equity in the home. To get 20 percent cash out, you’d need to have 40 percent in equity.
Typical conventional loans require PMI unless you put 20 percent down. However, a few lenders will waive PMI in exchange for a higher interest rate. This approach may cost even more than paying PMI unless you refinance out of the higher rate.
All FHA loans require 1.75 percent of the loan amount as upfront MIP. Annual MIP can vary from 0.45 percent to 1.05 percent depending on your loan amount, loan term, and down payment amount. If you get a 30-year loan and make the FHA’s minimum down payment of 3.5 percent, your annual MIP would add 0.85 percent of the loan amount per year.
If your loan balance goes down — as it should — every year, your FHA MIP will go down, too. This happens because MIP is charged as a percentage of your loan balance. You’ll pay a premium based on your original loan amount only in the first year.
The FHA changes its MIP rates from time to time. But these changes apply only to new FHA loans. Existing FHA loans keep their existing MIP rates and policies.
Yes. To avoid MIP or PMI, you’d need to save up a 20 percent down payment. Meanwhile, as you save money, house prices may be increasing. PMI and MIP allow you to buy sooner by lowering your down payment target.
When you’re buying a home, you’re mainly focused on getting into a place where you can set down roots and build a solid future. The down payment can be a big hurdle so high FHA PMI costs can be a worthwhile trade-off.
But now that you’re settled in, you might want to get rid of those FHA mortgage insurance premiums so you can put that money into savings, your child’s college fund, or toward high interest credit card debt.
Even if you can’t cancel your mortgage insurance now, you can make a plan for how you’re going to do it.
Tim Lucas (NMLS #118763 ) is an editor of MyMortgageInsider.com. He has appeared on Time.com, Realtor.com, Scotsman Guide, and more. You can connect with Tim on his website, ThisIsMortgage.com.