How to Eliminate Mortgage Insurance on an FHA Loan in 2023

Getting an FHA loan can be a great option for many homebuyers, especially first-time buyers or those with less-than-perfect credit. The low down payment requirement – as little as 35% – makes these loans very accessible However, FHA loans come with an extra cost mortgage insurance premiums, also known as MIP.

MIP protects the lender in case you default on the loan But it also adds hundreds of dollars to your monthly payment As a borrower, eliminating MIP can save you a lot of money over the life of your loan. So how do you get rid of mortgage insurance on an FHA loan?

In this comprehensive guide, we’ll walk through your options step-by-step Here’s what we’ll cover

• How FHA mortgage insurance works
• FHA mortgage insurance cancellation policies
• Steps to remove MIP from your FHA loan
• When refinancing makes sense to eliminate MIP
• FAQs on eliminating FHA mortgage insurance

Overview of FHA Mortgage Insurance

With an FHA loan, you’ll pay two types of mortgage insurance premiums:

• Upfront MIP: A one-time fee equal to 1.75% of your loan amount, paid at closing. On a $250,000 loan, this equals $4,375.

• Annual MIP: An ongoing premium charged monthly. This is typically 0.85% of your loan balance per year. On a $250,000 balance, you’d pay about $177 per month.

In total, a borrower with a $250,000 FHA loan can expect to pay around $30,000 in MIP over the life of the loan.

MIP protects the lender, not you. If you default, insurance payouts cover losses. But it’s the borrower who pays the premiums. That’s why removing MIP can save you thousands.

FHA Mortgage Insurance Cancellation Policies

FHA mortgage insurance cancellation policies depend on two key factors:

• When you originated the loan: Pre-2013 vs. post-2013
• Your down payment amount: Less than 10% vs. 10% or more

Here’s how it breaks down:

FHA Loans Originated Before June 2013

For FHA loans originated prior to June 3, 2013, MIP can be canceled when:

• Your loan reaches 78% loan-to-value (LTV) based on the home’s original value
• You have a solid payment history with no late payments

Once you hit 78% LTV, your servicer can automatically terminate the MIP as long as you’re in good standing.

FHA Loans Originated After June 2013

Cancellation policies are stricter for newer FHA loans made after June 3, 2013. Rules vary based on your down payment:

• Less than 10% down: MIP is charged for the full loan term. You’ll pay premiums for the life of the loan unless you refinance.

• 10% or more down: MIP terminates once your balance reaches 78% LTV based on the home’s original value. But this happens no sooner than 11 years from origination.

So if you put down less than 10%, you’ll be stuck paying MIP unless you refinance.

How to Remove MIP from Your FHA Loan

If you qualify to cancel FHA mortgage insurance, there are two ways to move forward:

1. Request Cancellation from Your Servicer

Once your loan and payment history meets the criteria, MIP removal should be automatic. But if premiums remain on your statement, contact your servicer to request cancellation.

You’ll need to verify:

• Original loan origination date
• Initial home purchase price
• All payments made to date have been on time

Provide documentation proving you’ve reached 78% LTV if requested.

Expect MIP termination within 60 days of submitting all required paperwork. This eliminates the premiums and lowers your monthly payments.

2. Refinance to a Conventional Loan

If your FHA loan doesn’t qualify for MIP termination, refinancing may eliminate the premiums.

Conventional loans don’t require mortgage insurance for LTVs of 80% or less. And you can cancel private mortgage insurance (PMI) once you reach 20% equity.

But run the numbers before you refinance. Closing costs are expensive – between 2% to 5% of your loan amount. Ensure the monthly savings outweigh this upfront fee.

Getting a lower interest rate also makes refinancing worthwhile. You can use our refinance calculator to compare options.

When Does Refinancing to Remove MIP Make Sense?

As discussed above, refinancing can potentially remove FHA mortgage insurance premiums. But it’s not the right move for everyone.

Here are four key considerations when deciding if you should refinance to eliminate MIP:

1. Your New Interest Rate

Refinancing costs money upfront. To make it worthwhile long-term, you need to secure a significantly lower rate. As a rule of thumb, aim for at least a 0.75 percentage point reduction. This level of savings outweighs closing costs over time.

2. Your Current LTV Ratio

What’s your current loan-to-value ratio? Conventional mortgages require PMI for LTVs above 80%. If your FHA loan LTV is still higher than this threshold, refinancing may not eliminate the premiums completely.

3. Your Credit Profile

Check your current credit score. Since origination, has your score improved significantly? Better credit means qualifying for a lower rate. If your score hasn’t changed much, you may not get approved for a worthwhile refinance.

4. Closing Costs

Estimate the total fees to refinance – between 2% to 5% of your balance. Will your savings each month exceed this upfront cost long-term? Factor in these expenses before deciding.

Carefully weighing these variables will tell you if refinancing makes sense to remove MIP. Speaking with a loan officer can also provide personalized insight.

FAQs on Eliminating Mortgage Insurance on FHA Loans

Here are answers to some frequently asked questions about removing mortgage insurance from FHA home loans:

Can I cancel MIP if I make a large lump sum payment?

No, one-time extra payments don’t affect your cancellation eligibility. MIP termination is based on reaching 78% LTV according to your loan’s amortization schedule and original home value.

If I refinance to a conventional loan, could I still owe PMI?

Yes, it’s possible. With conventional loans, you must have 20% equity to cancel mortgage insurance. If your new loan still has an LTV over 80%, PMI will be required.

Does a cash-out refinance let me remove mortgage insurance?

Not necessarily. With a cash-out refinance, you take equity out of your home. This means you end up with a higher LTV ratio, so you may owe MIP/PMI on the new loan.

What steps can I take to reach 78% LTV faster?

Making extra principal payments can help you build equity quicker. Another option is paying for an appraisal to verify your home value has increased. This lets you reach 78% LTV based on the appreciated value.

If I lost income, can I request lower FHA MIP rates?

Yes, FHA offers mortgage insurance premium reductions in certain financial hardships. You must apply through a Mortgage Assistance Application. Contact your lender to learn more about this option.

The Bottom Line

FHA mortgage insurance protects lenders, but costs borrowers thousands over the loan term. Removing MIP can lead to significant savings each month.

Cancellation criteria depends on when your loan originated and down payment amount. Refinancing to a conventional loan with 20% equity also eliminates the premiums.

Carefully consider all your options and run the numbers before moving forward. This ensures you find the most financially sound path to finally eliminate expensive FHA mortgage insurance premiums.