Can PMI Be Removed From FHA Loans?

Private mortgage insurance (PMI) is an additional cost required by most lenders when buyers put less than 20% down on a home loan. On conventional loans, PMI can be removed once equity reaches 20%. But Federal Housing Administration (FHA) loans work differently.

What Is PMI on an FHA Loan?

With an FHA loan, the equivalent of PMI is called mortgage insurance premiums (MIP). Borrowers pay an upfront MIP at closing of 175% of the loan amount Then there’s an annual MIP of 0.45% to 1.05% of the loan amount.

This insures the lender against default. If the borrower stops paying, the FHA reimburses the lender for losses.

Why Is It Harder To Remove MIP?

PMI on conventional loans disappears once you build 20% equity. But for FHA loans, removing MIP depends on a few factors:

• When the loan originated: Loans from July 1991 to December 2000 require MIP for the full loan term. Loans after January 2001 allow removal at 78% loan-to-value ratio (LTV).

• Down payment amount Loans after June 2013 allow MIP removal after 11 years if the down payment was at least 10%. For less than 10% down you pay for the loan’s duration.

So for many borrowers, MIP persists for the entire repayment period. The only ways to remove it are:

• Refinancing to a conventional loan if you now have 20% equity. This eliminates PMI.

• Paying down the loan to 78% LTV if your loan qualifies for removal.

Key Factors In Removing MIP

To refinance out of FHA and into a conventional loan, look at:

• Interest rates – Can you reduce your rate by 0.5 to 0.75 points? This can justify refinancing costs.

• Credit score – Improved credit widens your refi options and can help you qualify for better rates.

• Loan-to-value ratio – Increased home equity lowers your LTV. Below 80%, no PMI is required on a conventional loan.

• Closing costs – Do the math to see if monthly savings outweigh refi costs.

To reach 78% LTV and shed FHA MIP:

• Make extra payments toward principal to pay down your loan faster.

• Home improvements can raise property value, lowering your LTV.

• Rising home prices over time reduce your LTV as your home equity grows.

Should You Remove MIP?

Removing MIP seems like a no-brainer for lower payments. But weigh the options carefully:

Pros

• Lower monthly payments

• Frees up cash for other goals

• Allows you to pay off mortgage principal faster

Cons

• Refinancing costs money upfront

• You may need conventional PMI if below 20% equity

• Higher interest rate could increase total repayment costs

Do the math to see if refinancing or accelerating payments to reach 78% LTV makes sense. While removing MIP provides some savings, focus on your larger financial picture.

Alternatives To Refinancing

If the numbers don’t support refinancing to escape MIP, consider:

• Requesting lower MIP – The FHA lowered rates in recent years, so contact your lender.

• Loan modification – Your lender may modify your loan terms to reduce payments.

• Home equity loan/line – Use your equity for other needs rather than cash-out refinancing.

Key Takeaways

• FHA loan MIP is harder to remove than conventional PMI.

• Options are refinancing to a conventional loan or paying down to 78% LTV.

• Weigh the costs vs. savings and look at alternatives if refi doesn’t make sense.

• Work on paying your mortgage faster or improving your home to build equity.

While FHA MIP is frustrating, focus on the big picture. If refinancing isn’t best, chip away at your loan and leverage your equity through other means.