3 Things To Know About Removing FHA Mortgage Insurance?

Many first-time or repeat home buyers find FHA loans appealing for their flexible down payment and credit score criteria. Despite making homeownership more affordable, there’s a potential downside. FHA loans come with mortgage insurance premiums that are challenging to cancel, leading to unexpected costs. 

This article explores eligibility for removing FHA MIP, outlines the process to request cancellation from your lender if eligible, and provides insights for those who do not qualify.

Removing FHA Mortgage Insurance

An FHA loan necessitates additional protection to shield the lender’s liability. This includes an upfront mortgage insurance premium (MIP) and a recurring monthly fee, mandatory for all FHA loans. Consequently, buyers are obligated to make MIP payments regardless of their down payment, even if it exceeds 10%.

Fortunately, those with an FHA loan may be eligible for MIP cancellation, based on the mortgage closing date or down payment amount. Follow the steps below to explore the available options tailored to your circumstances.

1. Verify Your Eligibility 

To eliminate the mortgage insurance premiums on your FHA loan, you must meet certain qualifications. If your mortgage was initiated before June 3, 2013, you must satisfy the following conditions:

• You have diligently made each monthly mortgage payment punctually and as scheduled.
• You have already made payments for a minimum of five years on a 20, 25, or 30-year loan. (There is no timeframe specified for a 15-year mortgage.)
• Your mortgage maintains a loan-to-value ratio (LTV) of 78% or lower.

For loans finalized on or after June 3, 2013, ensure you have fulfilled the following requirements:

• You provided a down payment of 10% or more when buying the house.
• For the past 11 years, you have consistently made timely mortgage payments.

If you do not meet the conditions mentioned earlier, canceling your MIP without affecting your FHA loan is not possible. Yet, if you are committed to removing your mortgage insurance, consider refinancing your FHA loan to a conventional mortgage, ensuring you meet the necessary criteria for this alternative.

Most lenders require specific qualifications for refinancing, typically including:

• A credit score of 620 or above
• Having 5% to 25% equity in your home

The particular conditions outlined above may vary depending on the lender or type of loan selected. To verify your eligibility for MIP cancellation or refinancing, it is recommended to seek advice from a Home Loan Specialist beforehand.

2.What Are Your Options 

Before making a decision on whether to refinance your FHA loan or cancel your MIP, it’s important to weigh the advantages of each. In certain cases, opting for a refinance could prove more advantageous, even if you meet the requirements for cancellation.

Benefits of Removing FHA Mortgage Insurance

Eliminating your MIP will reduce your monthly mortgage payment by eliminating the premium. This decrease may empower you to allocate more funds towards your mortgage, potentially accelerating your payoff timeline.

Paying off your mortgage sooner can significantly reduce the interest you pay. Even a modest additional $50 monthly payment can lead to substantial long-term savings.

For instance, if you have a $200,000 FHA loan at a 4% interest rate, with a regular $954.83 monthly payment, it typically takes around 27 years to repay. By redirecting the $50 monthly MIP savings to make $1,004.83 monthly payments, you could shorten the payoff period by about 2 years and 8 months, potentially saving up to $14,413.27 in interest.

Benefits of Refinancing to a Conventional Loan

Refinancing can offer FHA borrowers numerous advantages. By switching to a new conventional mortgage, not only can you eliminate MIP payments, but you may also become eligible for a reduced interest rate or extended loan term, particularly if your credit score is strong. Essentially, this choice has the potential to significantly lessen your monthly payment burden.

However, it’s important to note that your credit score could impact your ability to secure a more favorable mortgage rate. If your current score is lower, consider waiting to refinance until you’ve bolstered your creditworthiness or explore refinance opportunities tailored for individuals with lower credit scores.

3.Get in touch with your lender

Inform your lender to discontinue your MIP if it has not been canceled yet or if you opt to refinance your mortgage.

Cancellation of FHA Mortgage Insurance

If your mortgage originated between January 2001 and June 3, 2013, your Mortgage Insurance Premium (MIP) should automatically cease once you attain 22% home equity. For those who closed on or after June 3, 2013, MIP will terminate after 11 years with a down payment exceeding 10%. If not, MIP payments will endure for the loan’s duration. Upon MIP cancellation, review your statements to confirm the cessation of monthly insurance premiums.

If MIP charges persist on your mortgage statement despite eligibility for termination, contact your lender for removal. They will verify your eligibility before discontinuing MIP coverage.

Refinancing with an FHA Loan

To refinance, you’ll apply for your new mortgage just as you would for any home loan. Inform your lender that you aim to switch your FHA mortgage to a conventional one to eliminate your MIP.

Subsequently, your loan officer will gather details about your current mortgage and initiate the approval process. Upon completing the new loan closing, your FHA mortgage will be settled, and you’ll have a fresh monthly payment amount, interest rate, and term.

To dive deeper into FHA mortgage insurance premiums and how to eliminate this additional cost, explore these frequently asked questions by homeowners.

FHA MIP Removal FAQs

If I refinance to a conventional mortgage will I have to pay PMI? 

For FHA loans mandating MIPs, borrowers must also cover private mortgage insurance (PMI) when opting for a conventional home loan with less than a 20% down payment. To sidestep the PMI requirement during refinancing, ensure that your new loan amounts to only 80% of your home’s value. If you opt for a larger refinancing amount, PMI payments are necessary until your LTV ratio hits 80%.

When can MIP be removed from an FHA loan? 

Depending on when your loan was finalized and your payment track record, the FHA MIP might cease after 11 years with a 10% down payment (for loans from June 3, 2013, onwards) or 5 years if the LTV is 78% (for loans before June 3, 2013).

If you concluded your FHA mortgage on or after June 3, 2013, without a minimum 10% down payment, MIP payments are required for the loan’s duration or until you opt for a different mortgage type through refinancing.

Can I reduce my mortgage insurance premium without removing it? 

If you’re not eligible for MIP removal or a traditional refinance, there’s still a chance to lower your insurance costs. Due to the decrease in interest rates in recent years, your annual mortgage insurance premium may have been set based on a higher rate. For example, if you obtained your FHA loan in January 2015 and your annual MIP was calculated at a higher rate than the current rates, you could opt for an FHA streamline refinance to secure a reduced annual rate. While you’ll still need to pay mortgage insurance premiums, the amount could be significantly lower, leading to a decrease in your monthly payment.

Can I use a cash-out refinance to cancel my MIP payments?

A cash-out refinance functions similarly to a typical refinance loan, but with the added benefit of converting a portion of your home’s equity into cash. This cash infusion can be allocated towards various purposes, ranging from home renovations to consolidating credit card debt. Theoretically, this option could also serve to eliminate your MIP. To qualify, it is imperative to ensure alignment with your lender’s stipulated minimum credit score and equity thresholds.

Key Takeaway

Although FHA loans are often easier to qualify for, they may end up being costlier in the long run due to MIP. Luckily, there are ways to eliminate MIP payments, like refinancing. To delve deeper into eligibility criteria, interest rates, or loan amounts you may qualify for, kick off your journey by completing an online application today.