Getting an FHA loan can help make homeownership more affordable thanks to low down payment requirements and flexible credit standards. However, FHA loans require you to pay mortgage insurance premiums (MIP) for the life of the loan, regardless of your down payment amount. This extra monthly cost can add up over time.
Fortunately, there are ways to remove MIP from an FHA loan. In this comprehensive guide, we’ll explain who qualifies for FHA MIP cancellation, when you can request removal, your alternatives if you don’t meet the requirements, and key factors to weigh before taking action.
FHA Mortgage Insurance Basics
With an FHA loan, you pay an upfront MIP at closing of 1.75% of the base loan amount, plus annual premiums. These annual premiums have two parts:
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Annual MIP – Paid monthly, this is 0.85% of your original loan amount.
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Annual FHA premium – An additional 0.05% charge added if your down payment was less than 10%.
For a $200,000 loan amount and 3.5% down payment, you’d pay about $259 per month in MIP Over 30 years, that totals over $93,000.
Removing MIP can save you thousands of dollars over your loan term. Next, let’s look at the eligibility criteria.
FHA MIP Removal Requirements
FHA guidelines let you request cancellation of your annual premiums (but not upfront MIP) if you meet certain criteria based on when you obtained your loan:
Pre-June 3, 2013 FHA Loans
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You’ve paid the premiums for at least 5 years.
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Your current loan-to-value (LTV) ratio is 78% or less.
Post-June 3, 2013 FHA Loans
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You made a down payment of at least 10%.
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You’ve paid the premiums for at least 11 years.
If you don’t meet either set of requirements, you’ll need to keep paying the premiums for the life of the loan or refinance to end them.
How to Request FHA Mortgage Insurance Removal
If you qualify for MIP termination, contact your mortgage servicer to start the process. You’ll need to verify:
- Your loan origination date
- Original LTV and current LTV
- Payment history
Provide copies of any home improvements or renovations to confirm the value if your home has increased.
The servicer will review your request and confirm if you meet the criteria for FHA MIP cancellation. If approved, the termination goes into effect at your next payment due date. You’ll see the reduced monthly payment starting that month.
What If You Don’t Qualify for FHA MIP Removal?
If you don’t satisfy the requirements to remove mortgage insurance from your FHA loan, you have a couple options:
Refinance to a Conventional Loan
With a conventional loan, you can cancel private mortgage insurance (PMI) once you reach 20% equity in the home.
Run the numbers to see if refinancing saves money in the long run after factoring in closing costs. Make sure to compare interest rates and qualifying terms too.
Refinance to Another FHA Loan
Refinancing to a new FHA mortgage can potentially get you better rates and let you restart the 11-year MIP payment clock if you now have 10% equity.
Carefully compare costs and run calculations to see which option offers more savings over time.
Apply for an MIP Reduction
If you’re struggling to make payments, ask your servicer about a partial reduction in your MIP amount. They can lower the annual premium from 0.85% to 0.55%, 0.45% or 0.30% depending on your circumstances.
Every little bit of savings helps. Make sure to explore this option if you need payment relief.
Key Factors to Consider Before Removing FHA Mortgage Insurance
While canceling MIP can reduce your monthly costs, it’s not the right move for everyone. Before requesting removal, think through how it could impact your finances overall.
Closing Costs to Refinance
To refinance your FHA loan, you’ll have to pay closing costs that can range from 2% to 6% of your loan amount. Make sure long-term savings exceed this upfront expense.
Interest Rate Changes
If rates are higher now than when you got your original loan, your monthly payment could increase when you refinance, even without MIP. Account for any rate differences in your calculations.
Home Equity
Review your current LTV ratio to see where you stand in terms of equity. Refinancing only makes sense if you have 20% or more so you can avoid private mortgage insurance.
Credit Score Improvement
A better credit score now versus when you first got your loan may qualify you for lower rates and more favorable loan terms. In that case, refinancing could offer big savings.
Carefully weighing these aspects ensures you make the optimal choice when it comes to removing FHA mortgage insurance premiums.
Alternatives to Canceling Mortgage Insurance
If you don’t qualify to remove MIP from your FHA loan, here are some other money-saving options to look into:
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Lower your interest rate – Refinancing to a lower rate can reduce your monthly payments and overall interest costs. Run the numbers to see if you’ll come out ahead even with closing costs factored in.
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Pay extra each month – Making an extra principal payment every month brings down your loan balance faster so you pay less interest. Putting that same $50 you were spending on MIP towards the principal can make a difference over time.
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Make a one-time lump sum payment – If you have funds available like a tax refund or inheritance, consider making a lump sum payment to pay down your principal for instant savings. Every $1,000 paid can lower your balance by years and hundreds in interest.
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Recast your mortgage – This adjusts your principal balance to account for past one-time extra payments you’ve made but keeps the same term length and interest rate to maintain lower monthly payments.
The Bottom Line
Removing mortgage insurance premiums from an FHA loan can be challenging but offers real savings. Make sure you fully understand the qualification criteria and weigh all your alternatives when deciding on the best path forward.
Stay in close contact with your servicer and ask questions every step of the way when pursuing MIP cancellation or refinancing to a new loan. With persistence and smart planning, you can free yourself of costly mortgage insurance and achieve a lower monthly payment and interest savings.
How To Remove FHA Mortgage Insurance: Step-By-Step
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How to Eliminate Mortgage Insurance Premium from FHA Loans?
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