fha loan and pmi removal

The Ins and Outs of Removing PMI from an FHA Loan

If you’re a homeowner with an FHA loan you’re probably familiar with the monthly mortgage insurance premiums (MIP) that come along with it. While MIP can make buying a home more affordable upfront by allowing lower down payments, it also adds to your monthly payments for the life of the loan.

Many FHA borrowers dream of the day they can finally get rid of MIP and put those extra funds towards paying down principal or other financial goals But how and when can you remove PMI from an FHA loan? Let’s take a detailed look,

What is MIP?

MIP stands for mortgage insurance premiums. It’s a type of insurance that protects the lender, not you as the borrower, in case you default on an FHA loan. All FHA loans require you to pay MIP, no matter how large your down payment.

MIP comes in two forms:

• Upfront MIP – This is a one-time fee of 1.75% of the loan amount, rolled into your mortgage. So if you borrow $200,000, your upfront MIP is $3,500.

• Annual MIP – This is an ongoing monthly fee of 0.45% – 1.05% of your loan amount. On that same $200,000 loan, you’d pay $750 – $1,750 per year.

In total, MIP can add hundreds of dollars to your monthly mortgage payments over the years. That’s why many FHA borrowers are eager to remove PMI when they can.

When Can I Remove PMI from My FHA Loan?

The ability to cancel MIP depends primarily on two factors – when you obtained your FHA loan and how much you put down:

Loans originated before June 2013

For FHA loans taken out before June 3, 2013, the following criteria must be met:

• You’ve paid your mortgage on time for the past 5 years
• Your loan has reached 78% loan-to-value (your loan balance is 78% or less than the home’s value)

In this case, your MIP can be removed automatically by your lender after 5 years once you hit that 78% LTV mark.

Loans originated after June 2013

For newer FHA loans taken out on or after June 3, 2013, the requirements are a bit stricter:

• You made a down payment of at least 10%
• You’ve paid your mortgage on time for 11 years

Only then can your MIP be automatically canceled. If you put down less than 10%, you’ll pay the monthly MIP for the life of the loan.

How to Request MIP Cancellation on an FHA Loan

If you meet the eligibility criteria for MIP cancellation outlined above, your lender should remove the fees automatically. However, mistakes do happen. Verify that your MIP was canceled as expected by checking your mortgage statements.

If you still see MIP being charged after meeting cancellation requirements, here’s how to request removal:

1. Contact your mortgage servicer. Call or send a secured message through your online account portal.

2. Explain that you meet the requirements for MIP cancellation based on your loan origination date, payment history, loan balance, and equity.

3. Request confirmation of your eligibility and that they remove the fees.

4. Continue following up every month until the premiums are taken off your monthly bill.

Be persistent and keep notes of who you spoke with. It may take one to two billing cycles for removal to take effect.

Refinancing to Remove PMI from an FHA Loan

If your FHA loan isn’t eligible for MIP cancellation based on the criteria above, you may want to refinance to remove PMI. Here are two common refinancing options to consider:

Conventional Loan Refinance

You can refinance into a conventional loan, which allows PMI removal once you reach 20% home equity. Conventional loans also require PMI for a shorter time than FHA loans.

However, you’ll likely need a good credit score and enough equity to qualify. Closing costs are also required, so shop around for the best rates and fees.

FHA Streamline Refinance

An FHA streamline refinance lets you refinance into a new FHA loan to obtain a lower interest rate or payments, without requiring an appraisal or credit check.

While this option won’t remove MIP completely, it could potentially lower your annual MIP rate based on today’s rates vs. what you qualified for originally. Closing costs are limited too.

This can make sense if you don’t have the equity or credit score yet to qualify for a conventional loan, but still want to reduce your payments.

Weighing the Pros and Cons of Removing PMI

Eliminating your MIP seems like a no-brainer, right? But before you rush into a refinance, let’s go over some of the key pros and cons:

Pros of Removing PMI:

• Lower monthly mortgage payments
• Put savings toward paying off principal
• Potentially qualify for better rate through refinance

Cons of Removing PMI:

• Upfront costs to refinance
• Lower monthly savings than expected
• Interest rates are higher now than when you obtained FHA loan
• You may need to pay PMI on a new conventional loan

Do the math carefully and compare your current loan with any new loan offers. While removing MIP can provide meaningful savings each month, sometimes sticking with your current FHA loan makes the most financial sense in the long run.

Options for Reducing MIP Payments

If you aren’t in a position to eliminate MIP completely, look into these options to potentially lower your premiums:

1. Refinance into a lower rate FHA loan to reduce your annual MIP.

2. Make additional principal payments each month to get to that 78% LTV milestone faster for cancellation.

3. Request a lower MIP rate if your loan originated when rates were higher.

4. Seek loan modifications from your lender, if eligible. This can potentially lower your interest rate and monthly payments.

5. Compare lenders to see if any offer lower FHA MIP rates than what you currently have.

Understanding MIP Cancellation for FHA Loans

While removing PMI from an FHA mortgage usually isn’t as straightforward as other loan types, options do exist in certain situations. Determine if and when you may qualify for cancellation or consider scenarios where refinancing could eliminate the monthly fees and save you money.

As you get closer to achieving 20% equity and having paid your mortgage diligently for years, be sure to stay on top of your lender to have MIP canceled the moment you hit those milestones. Keep an eye out for any new federal mortgage insurance programs as well that may benefit FHA borrowers.

Owning a home and managing an FHA loan comes with its challenges. But take it one step at a time. Understanding how to remove PMI from your mortgage empowers you to better reach your home financing goals.