Can You Remove PMI on an FHA Loan?

Private mortgage insurance (PMI) is an extra cost that many homebuyers face when they cannot make a 20% down payment on their home loan This additional monthly fee protects the lender in case the borrower defaults early in the loan term With home prices rising, it’s increasingly common to take out a mortgage with less than 20% down. So understanding PMI, including how and when you can remove it, has become more important for buyers.

FHA loans, a popular low down payment mortgage program, come with their own version of mortgage insurance called MIP. FHA mortgage insurance premiums can be high, up to 1.75% of the loan amount paid upfront plus 0.85% of the loan balance paid annually. And once you have an FHA loan, removing MIP can be more difficult than removing PMI.

In this article we’ll answer common questions about canceling FHA mortgage insurance premiums without refinancing. including

• What is MIP on FHA loans?
• Can you remove PMI from FHA mortgages?
• How to cancel MIP on FHA loans from 2013 onward
• Eliminating MIP on pre-2013 FHA loans
• When can I remove PMI from an FHA loan?
• Refinancing to lose the MIP

What Is MIP on FHA Loans?

MIP stands for “mortgage insurance premium.” It’s the FHA’s version of private mortgage insurance, or PMI. All FHA-insured mortgages require an upfront MIP payment of 1.75% of the loan amount. This premium is usually rolled into the total loan balance.

In addition to the upfront cost, most FHA mortgages also require an annual MIP of 0.85% of the loan amount. On a $250,000 loan, the annual MIP costs a borrower $2,125 per year or about $177 per month.

Annual MIP rates on FHA loans can range from 0.45% to 1.05% depending on the loan term, down payment, and total loan amount. But 0.85% is the standard rate for a 30-year mortgage with 3.5% down.

MIP helps fund the Federal Housing Administration mortgage program. It also protects lenders from losses if an FHA borrower defaults. But MIP can significantly increase monthly mortgage costs for buyers.

Can You Remove PMI From FHA Mortgages?

Whether and how you can cancel MIP on an FHA loan depends primarily on two factors:

1. When you got the loan

FHA loans from before 2013 have easier MIP cancellation options than newer loans.

2. How much you put down

If your down payment was less than 10%, canceling MIP is very difficult or impossible.

Let’s look at the MIP cancellation rules for older and newer FHA loans in more detail.

Removing MIP on Pre-2013 FHA Loans

FHA mortgages that closed before June 3, 2013, have more lenient annual MIP cancellation policies. For these loans you can request to stop paying annual MIP when:

• Your loan is in good standing
• Your current loan balance is 78% or less than the home’s original value

This policy allows you to cancel MIP without refinancing or waiting for it to expire automatically. Once your principal balance reaches 78% of the FHA appraised value from when you purchased the home, ask your loan servicer to remove your annual MIP.

This cancellation option has saved many longtime FHA borrowers hundreds per month. But it only applies to FHA loans from before June 3, 2013.

Canceling MIP on FHA Loans from 2013 Onward

FHA mortgages closed on June 3, 2013, or later have stricter annual MIP rules. For these loans:

• You can only cancel MIP after 11 years if you made a down payment of at least 10%
• MIP is required for the life of the loan if you put down less than 10%

Unless you made a down payment above the minimum FHA requirement of 3.5%, you won’t be able to stop paying annual MIP on a 2013 or later FHA mortgage until you pay off the loan.

These rules make paying off MIP through a mortgage refinance the only option for most recent FHA borrowers.

When Can I Remove PMI From an FHA Loan?

When and how you can remove mortgage insurance premiums from an FHA mortgage depend completely on your loan vintage and down payment amount.

For FHA loans closed before June 2013, you can request to cancel your annual MIP once you reach 78% loan-to-value based on the home’s original FHA appraisal.

If you got an FHA loan in 2013 or later:

• Loans with 10% down: MIP will expire automatically after 11 years of payments
• Less than 10% down: You’ll pay the annual MIP premium until you pay off the mortgage

Refinancing is the most common way current FHA borrowers can eliminate mortgage insurance premiums.

Refinancing to Lose the MIP

Many homeowners with FHA loans refinance to remove their MIP payments. Going from an FHA loan to a conventional mortgage is the most popular route.

Conventional mortgages don’t require mortgage insurance if you put down 20% or have 20% equity when you refinance. To qualify for a no-PMI conventional refi you’ll typically need:

• A credit score of at least 620
• A total debt-to-income ratio below 50%
• Loan balance below 80% of your home’s value

Run the numbers before you refinance an FHA loan, even if your goal is escaping MIP. Closing costs for a refinance can equal 5% of the new loan amount. And if current rates exceed your existing FHA rate, your interest costs will go up.

Compare refinance Loan Estimates from multiple lenders. While you want to remove MIP payments, keeping your interest rate low is just as important.

Weighing the Cost of Conventional PMI vs. FHA MIP

If you don’t have 20% equity to refinance into a conventional mortgage, you’ll pay private mortgage insurance. Comparing FHA MIP to PMI on a conventional loan gets confusing.

Annual PMI rates usually fall between 0.5% to 1.5% of the loan balance. On paper, PMI seems more affordable than the FHA’s 0.85% annual MIP rate.

But for borrowers with weaker credit or high debt, FHA loans can provide lower total mortgage payments than a conventional loan with PMI.

Every situation is different. Get Loan Estimates from multiple lenders to see actual PMI and MIP costs for your situation. Don’t assume one will clearly be cheaper than the other.

Alternatives to Refinancing Out of FHA MIP

Refinancing brings costs that range from 3% to 6% of the new mortgage amount. With interest rates rising, your new refi rate could also exceed your current FHA loan’s rate. Two alternatives to refinancing can get rid of MIP for some borrowers.

1. Cancel MIP on older FHA loans

If your loan closed before June 2013, request MIP cancellation through your servicer once you reach 78% loan-to-value based on the home’s original FHA appraisal amount.

2. Make extra payments

On loans closed in 2013 or later, paying down your balance faster can help you reach the 78% LTV threshold for automatic PMI cancellation sooner.

While most FHA borrowers need to refinance to shed MIP, some alternatives exist. Your loan type, down payment, and current home equity determine your options.

Key Takeaways

Removing mortgage insurance premiums from FHA loans is difficult for most borrowers. MIP cancellation policies vary sharply depending on when the loan originated and your down payment amount. Some key points:

• Pre-2013 FHA loans: Annual MIP expires when your balance reaches 78% LTV
• 2013 and later: MIP ends after 11 years only if you put down 10% or more
• Less than 10% down: You’ll likely need to refinance to remove MIP
• Refinancing requires costs and could raise your rate, so compare options
• For some borrowers, conventional PMI costs more than FHA MIP

Shop multiple lenders to see if refinancing helps you eliminate expensive mortgage insurance premiums without raising your rate or payment. Removing MIP can save hundreds per month, but look at the whole picture before you refinance an FHA loan.