How to Remove Mortgage Insurance from Your FHA Loan
FHA loans, insured by the Federal Housing Administration, require borrowers to pay mortgage insurance premiums (MIP). These premiums are added costs paid upfront and throughout the loan term, regardless of the down payment amount. Here’s what you need to know to eliminate FHA mortgage insurance premiums.
What is FHA mortgage insurance?
FHA mortgage insurance is a protection for lenders. It is required on all FHA loans, no matter how large of a down payment the borrower makes is. It includes:
- Upfront Mortgage Insurance Premiums (UFMIP) – typically paid at closing
- Annual Mortgage Insurance Premium (MIP) – Paid monthly and, depending on the terms, may last for the life of the loan
FHA loans have stricter requirements than conventional loans, which can allow PMI to be canceled after reaching 20% equity.
How to Remove FHA Mortgage Insurance
1. Check the eligibility of the loan:
Removal of FHA mortgage insurance depends on when the loan originated. If it was before July 1991, MIP cannot be canceled. Between January 2001 and June 3, 2013, MIP is canceled when the loan-to-value (LTV) ratio reaches 78%, assuming payments are current. After June 3, 2013, MIP lasts for 11 years if you put down at least 10%. If it was less than 10%, MIP will last for the life of the loan.
2. Wait for automatic removal:
The mortgage servicer will automatically cancel MIP once the loan meets the criteria and is eligible. For example, the loan reaches a 78% LTV ratio or 11 years of payments (for loans after June 3, 2013).
3. Refinance to a conventional loan:
Refinancing is one of the most effective ways to eliminate MIP. Switching to a conventional loan can allow MIP to be avoided entirely once the loan reaches 20% equity.
Key consideration for refinancing:
- interest rates: Refinancing is most effective and beneficial if you’re looking to lower your interest rate.
- credit score: Conventional loans often require a minimum credit score of 620. However, a higher credit score increases your chances of qualifying.
- LTV Ratio: Rising home values or improvements can lower LTV ratio and increase chances of avoiding PMI
- Closing costs: Factor in refinancing costs to determine long-term savings.
Step to take for PMI and MIP Removal
1. Request PMI cancellation on conventional loans- If a borrower has built 20% equity in their home through payments or rising property values, they can request PMI cancellation in writing. Ensure all payments are current and provide proof of the home’s value if required.
2. Use a new home appraisal- If the value of the home has increased significantly, a new home appraisal can show that the borrower has reached 20% equity faster, helping to cancel PMI or improve refinancing options.
3. Explore more loan programs– If making payments is becoming a struggle, contacting the mortgage servicer to explore loan modifications or programs that can ease financial burden.
Why Removing FHA Mortgage Insurance Is Important for Homeowners
Eliminating MIP reduces monthly costs and opens the door for other financial opportunities such as paying down mortgage principal faster, investing in home improvements, building emergency savings, and more. Hundreds of savings a month, can lead to thousands of savings over the life of the loan.
Is refinancing worth it?
Refinancing to remove MIP is a smart move for many homeowners but is circumstantial. Running the numbers to ensure the savings from lower monthly payments outweigh the costs of refinancing is crucial.
Understanding how to remove FHA mortgage insurance can save money and provide financial freedom. Whether a borrower qualifies for automatic removal, opts to refinance, or explores other options, staying informed is key. By optimizing the loan and removing FHA mortgage insurance, borrowers are one step closer to achieving long-term financial goals.
Start saving today
Understanding how to remove FHA mortgage insurance is a crucial step toward saving money and achieving financial freedom. Whether you’re eligible for automatic MIP removal, considering refinancing, or exploring other options, staying informed and proactive can lead to significant savings. Don’t wait—explore your options today and take control of your financial future.
Ready to remove FHA mortgage insurance and save on your monthly payments? Contact us today to learn more about your options and find out how refinancing or MIP removal can benefit you!
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