How to Cancel MIP on an FHA Loan and Stop Paying Mortgage Insurance

Getting an FHA loan can be a great way for first-time homebuyers or those with lower credit scores to purchase a home. The low down payment requirements and flexible credit guidelines make FHA loans accessible to many borrowers who may not qualify for other loan types.

However FHA loans come with an extra cost in the form of mortgage insurance premiums (MIP). This includes both an upfront MIP charge at closing as well as ongoing monthly MIP payments added to your mortgage.

The good news is that you may be able to cancel MIP on your FHA loan under certain circumstances. Here’s what you need to know about removing mortgage insurance from an FHA mortgage.

What Is MIP on FHA Loans?

MIP stands for mortgage insurance premiums. This is a type of insurance you’re required to pay on FHA loans that protects the lender in case you default.

There are two parts to FHA MIP

• Upfront MIP – A one-time fee equal to 1.75% of the total loan amount, paid at closing.

• Annual MIP – An annual fee charged monthly, based on a percentage of your loan amount and loan-to-value ratio Currently this rate is 055% for most FHA loans.

You have to pay MIP when you get an FHA loan no matter how much you put down. And unlike with conventional loans, you can’t cancel PMI once you reach 20% equity.

So is there any way to get rid of MIP on an FHA mortgage? Let’s take a look at your options.

When Does MIP Expire on FHA Loans?

Whether your MIP ever expires depends on two main factors:

• When you got the loan – FHA guidelines changed in 2013, so loans from before and after that date have different MIP rules.

• Your down payment amount – If your down payment was at least 10%, you may be eligible for MIP cancellation after 11 years.

Here’s a breakdown of when MIP expires on FHA loans:

• FHA loans closed before June 3, 2013 – MIP expires once you reach 78% loan-to-value ratio and 5 years of payments.

• FHA loans closed after June 3, 2013 with <10% down – MIP lasts for the life of the loan.

• FHA loans closed after June 3, 2013 with ≥10% down – MIP expires after 11 years.

As you can see, if you put less than 10% down on a post-2013 FHA loan, you’ll be stuck paying MIP for the entire loan term unless you refinance.

How to Cancel MIP on FHA Loans

If your MIP won’t expire on its own based on the above criteria, your main option is to refinance into a conventional loan. Here are the steps to remove MIP by refinancing:

1. Check your home equity – You’ll generally need at least 20% equity to qualify for a conventional refinance with no PMI.

2. Improve your credit score – Aim for a score of at least 620 to qualify for better refinance rates.

3. Find lenders and compare mortgage rates – Shop around to find the best refinance deals. Inform lenders you want to cancel MIP.

4. Complete the application process – Provide documents, get an appraisal, and go through underwriting.

5. Close on your new conventional loan – This will replace your FHA mortgage and remove MIP payments.

Waiting to refinance until you have 20% equity allows you to cancel both FHA MIP and avoid private mortgage insurance (PMI) on the new loan.

Alternatives to Refinancing to Remove MIP

Refinancing into a conventional loan is the main path to FHA MIP cancellation if your MIP isn’t scheduled to expire. But here are a couple other options that may help reduce your mortgage insurance costs:

• Lower your FHA MIP rate – MIP rates have gradually decreased over the years. Refinancing into a new FHA loan could secure a lower MIP rate.

• FHA streamline refinance – This option lets you refinance into a new FHA loan with lower upfront and monthly MIP costs if you had an eligible older FHA loan.

These won’t eliminate MIP completely but could potentially lower your monthly mortgage insurance payment.

Tips for Removing MIP on an FHA Mortgage

Here are some final tips when navigating FHA MIP cancellation:

• Contact your lender to verify when your MIP will expire if you think you may qualify for automatic cancellation.

• Aim for the best credit score possible before refinancing to improve your rate and eligibility.

• Shop mortgage rates from multiple lenders to find the best FHA streamline or conventional refinance deal.

• Calculate your home equity to determine if you have 20% equity yet to refinance into a conventional loan.

• Add closing costs to your new loan amount instead of paying out of pocket if needed.

• Be aware that refinancing restarts your loan term at 30 years. Consider a 15-year term to build equity faster.

With the right planning and preparation, you can position yourself to remove expensive FHA MIP from your mortgage payment. Consult with lenders to go over your options and see if now is the right time to refinance.