Can You Remove PMI from an FHA Loan?

Private mortgage insurance (PMI) is an extra cost many homebuyers have to pay on top of their monthly mortgage payment. It protects the lender in case the borrower defaults. With conventional loans PMI can be removed once you build up enough equity. But Federal Housing Administration (FHA) loans are a different animal. They require mortgage insurance premiums (MIP) that stick around for the life of the loan in most cases.

So can you remove PMI from an FHA loan? The short answer is no You cannot remove private mortgage insurance from an FHA loan because FHA loans don’t have PMI They have MIP which works differently,

Confusing the two is extremely common. But make no mistake: FHA loans carry MIP, not PMI. The rules around canceling MIP are much stricter. Here’s what borrowers with FHA loans need to know about removing mortgage insurance premiums.

FHA Loans Have MIP, Not PMI

First, it’s crucial to understand the difference between PMI and MIP:

• PMI is private mortgage insurance required on conventional loans with less than 20% down. It protects private lenders.

• MIP is mortgage insurance premiums on FHA loans, which insure the loan on behalf of the Federal Housing Administration.

The insurance types sound similar but have key differences:

PMI:

• Goes to private mortgage insurers

• Is charged on conventional loans

• Can be removed once 20% equity is reached

MIP:

• Goes to the government (FHA)

• Is charged on FHA loans

• Stays for the life of most FHA loans

Borrowers often use “PMI” and “MIP” interchangeably. But FHA loans do not actually have PMI. So there’s no PMI to remove on an FHA mortgage. There is only MIP, which has much stricter cancellation rules.

When Can You Cancel FHA MIP?

The ability to remove MIP from an FHA loan depends on two main factors:

When You Originated the Loan

FHA MIP cancellation eligibility depends largely on when you originated the mortgage:

• Before July 1991 – MIP is required for the life of the loan.

• July 1991 to December 2000 – MIP also remains for the life of the loan.

• January 2001 to June 2013 – MIP cancels automatically when you reach 78% loan-to-value ratio.

• After June 2013 – MIP cancels after 11 years if you put down over 10%. Otherwise, it remains for the full term.

Your Equity

For newer FHA loans, you must also have enough home equity built up for MIP to cancel automatically.

• For loans after 2013, MIP drops off after 11 years if your down payment exceeded 10%.

• For loans between 2001 and 2013, MIP won’t cancel until you reach 78% loan-to-value.

So if you took out your FHA loan before the 2000s, you likely won’t shed FHA MIP unless you refinance. But if your loan is from this century and you have enough equity, MIP could fall off the loan after 11 years or hitting 78% LTV.

How to Remove MIP from FHA Loans

If your FHA loan isn’t eligible for MIP cancellation, you still have options to remove mortgage insurance premiums—mainly refinancing:

1. Refinance to a Conventional Loan

You can refinance an FHA loan into a conventional mortgage. Conventional loans allow you to cancel PMI once you have 20% equity.

Just keep in mind:

• You’ll only shed mortgage insurance if your new loan-to-value ratio is 80% or less.

• Refinancing has costs like appraisal and closing fees. Make sure the savings exceed the costs.

• Your credit and finances need to qualify for a conventional refinance at a competitive rate.

2. Refinance to a New FHA Loan

Refinancing into a new FHA mortgage won’t remove MIP completely. But it could help you:

• Cancel MIP sooner if your old FHA loan wasn’t eligible.

• Lower your interest rate and monthly payment.

• Shorten your loan term to build equity faster.

• Reduce your MIP rate if you now have over 10% equity.

Again, run the numbers to see if lowering your rate and payments outweighs closing costs.

3. Apply for MIP Removal

For FHA loans eligible for cancellation, MIP should fall off automatically once you hit the equity or time requirements. But it can’t hurt to contact your mortgage servicer to request removal if you meet all the criteria and your MIP remains.

The Pros and Cons of Removing MIP

Clearly, canceling FHA MIP can save money on your monthly mortgage payment. But is it always the right move? Here are some potential pros and cons:

Pros

• Lowers your monthly payments
• Frees up cash to build savings or pay other debts
• Results in interest savings over loan term
• Allows faster equity build-up in the home

Cons

• Refinancing costs money upfront
• May not provide enough savings to justify costs
• Could increase rate/payment if refinancing improperly
• Still may require PMI if not enough equity for conventional

Do the math to make sure it makes sense long-term before refinancing an FHA loan strictly to remove MIP. In some cases, waiting out the MIP may be the more prudent option. But for many borrowers, the savings are well worth refinancing.

Alternatives to Removing FHA Mortgage Insurance

If refinancing doesn’t make sense for you, consider these alternatives to canceling MIP:

• Make extra payments to pay down your loan principal faster
• Increase your down payment with a future refinance
• Improve your credit so you can qualify for better refi rates
• Sell and buy a new home to ditch FHA MIP completely

While not as direct as refinancing, these options can also help you save on mortgage insurance premiums.

The Bottom Line

Removing private mortgage insurance from an FHA loan is complicated by the fact that FHA mortgages don’t actually have PMI. They require MIP, which is structured differently.

The ability to cancel MIP depends largely on when you originated your FHA mortgage:

• Older FHA loans generally require MIP for the full term.

• Newer ones let you remove MIP after 11 years or hitting 78% loan-to-value ratio.

If you have an older FHA mortgage that doesn’t qualify for cancellation, your main options are refinancing into a conventional loan or new FHA mortgage. This can allow you to remove mortgage insurance completely or at least reduce the premiums.

Just be sure refinancing makes sense by crunching the numbers. In many cases, the savings outweigh the upfront costs. But for some, sticking with the current FHA loan as is may be the better financial move.