Getting an FHA loan can be a great way for first-time homebuyers and those with lower credit scores to purchase a home The low down payment requirements of just 35% make FHA loans accessible. However, FHA loans come with mortgage insurance premiums (MIP) that must be paid for the life of the loan. This extra monthly expense can add up over time. So a common question borrowers ask is can I drop PMI on an FHA loan?
What is MIP on FHA Loans?
MIP stands for mortgage insurance premiums. This is a type of insurance that protects the lender in case the borrower defaults on the loan. All FHA loans require:
- Upfront MIP – 1.75% of the loan amount paid at closing
- Annual MIP – 0.85% of the loan amount paid monthly
On a $200,000 loan, you would pay $3,500 upfront and $142 per month. Over a 30 year loan, total MIP costs could exceed $30,000.
When Can You Remove MIP on FHA Loans?
Whether or not you can drop MIP on an FHA loan depends on when you got the loan:
FHA Loans Originated Before June 3, 2013
For older FHA loans, you can request to have annual MIP cancelled once you reach 78% loan-to-value ratio (LTV). This happens automatically when your loan balance reaches 78% of the home’s original value
Example:
Original Loan Amount $200000Original Home Value $250,000
Once your balance is 78% of $250,000 ($195,000), you can cancel annual MIP.
FHA Loans Originated On or After June 3, 2013
For newer FHA loans, the rules are stricter. MIP is required for the life of the loan, unless:
- You put 10% or more down – MIP drops off after 11 years
- You took a 15 year loan – Lower MIP rates apply
Otherwise, you cannot cancel MIP and it will continue until you pay off the loan.
Refinancing to Remove MIP
If you have an FHA loan originated after 2013 and didn’t put down 10%, the only way to remove MIP is to refinance into a conventional loan.
Conventional loans allow you to cancel private mortgage insurance (PMI) once you reach 20% equity in the home.
To qualify for a refinance you’ll typically need:
- Credit score of at least 620
- Debt-to-income ratio below 50%
- Loan-to-value ratio of 80% or less
Refinancing makes sense if you can get a lower rate than your current FHA loan. Shop around to compare rates from multiple lenders.
Tips to Reduce FHA MIP Costs
While you may be stuck with MIP for the life of your FHA loan, there are some ways to reduce costs:
- Put down 10% or more – Drops annual MIP after 11 years
- Take a 15 year term – Lowers annual MIP rate to 0.70%
- Pay down your loan faster – Since MIP is a percentage of the balance, paying extra each month reduces costs
Is MIP More Expensive Than PMI?
For borrowers with excellent credit and 20% down, PMI on a conventional loan will be cheaper than MIP on an FHA loan. But for those with lower credit scores or down payments under 5%, FHA MIP may actually be less expensive than PMI rates.
Always compare total costs for both loan types from multiple lenders. Do the math to see which option saves you the most money.
The Bottom Line
While removing MIP from an FHA loan can be difficult, it’s not impossible. Paying down your loan faster, refinancing, or meeting one of the FHA’s MIP cancellation requirements can eventually eliminate this extra expense. Talk to a loan officer to discuss your specific options based on your financial situation.
How To Remove FHA Mortgage Insurance: Step-By-Step
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How to Eliminate Mortgage Insurance Premium from FHA Loans?
FAQ
How to get rid of PMI on an FHA loan?
Can you avoid PMI on an FHA loan?
How long do you have to carry PMI on a FHA loan?
Can you remove PMI if property value increases?
Can I drop PMI on an FHA loan?
If you cannot drop PMI on an FHA loan, you can still take some steps to remove it. Once you have paid off at least 20% of your loan, you can request your lender remove PMI. But you may need to meet certain criteria, such as making on-time payments and having no late payments in the past year.
Do FHA loans require PMI?
But the rules are different for home buyers using an FHA loan. All FHA loans require mortgage insurance premium (MIP), regardless of down payment size. So you will have to pay FHA mortgage insurance even if you put down 20 percent or more. Can PMI be removed from FHA loans?
Can I remove PMI from my mortgage payment?
Some types of loans don’t let you make payments ahead of time for the purpose of mortgage insurance removal. You can remove PMI from your monthly payment once you have 20% equity in your home. You can do this either by requesting its cancellation or refinancing the loan.
Can you refinance a mortgage without PMI?
You can also refinance into a loan that doesn’t require PMI. One way to do this is by “piggybacking” — that is, taking out a home equity loan, line of credit or other mortgage, in addition to the new primary one. This additional loan finances your down payment, getting it to the 20 percent mark.