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Getting an FHA loan can be a great way for first-time homebuyers or those with less-than-perfect credit to purchase a home. FHA loans require a low down payment and have flexible credit requirements. However, they come with an extra cost in the form of mortgage insurance premiums (MIP).
MIP is required on all FHA loans to protect the lender in case of default It includes both an upfront fee at closing and an annual fee paid monthly along with your mortgage payment. This extra monthly cost is understandably frustrating for borrowers who want to pay down their loan faster
Thankfully, you may be able to remove MIP from your FHA loan. Here’s what you need to know about canceling MIP on an FHA mortgage, plus tips for refinancing into a conventional loan to eliminate it completely.
When Does MIP Expire on an FHA Loan?
The rules around FHA MIP cancellation depend on when you originally got your loan:
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FHA loans from before June 2013 – Your MIP will automatically cancel when you reach 78% loan-to-value (LTV) ratio and have paid the monthly premium for at least 60 months. This usually happens around 5 years into the loan.
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FHA loans after June 2013 – If you put down less than 10%, you’ll pay the MIP for the life of the loan. If you put down 10% or more, MIP expires after 11 years.
So if you got your FHA mortgage after 2013 and didn’t put down at least 10%, you won’t be able to cancel MIP unless you refinance
Refinancing to Remove FHA Mortgage Insurance
The most common way to get rid of MIP on a post-2013 FHA loan is to refinance into a conventional mortgage. Here are some key points on doing an FHA-to-conventional refinance:
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You’ll likely need at least 20% equity in your home to qualify for a conventional loan without PMI.
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Make sure your credit score is 620 or higher. Many lenders require a minimum score of 620-640 on conventional loans.
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Shop around for the best rates. Compare quotes from multiple lenders.
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Closing costs can be rolled into your new loan amount instead of paid upfront. But this increases your overall balance.
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You get a whole new loan with a different term, interest rate, and monthly payment.
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There are no prepayment penalties for paying off your FHA loan early through refinancing.
How Much Could You Save by Removing MIP?
FHA mortgage insurance premiums are calculated as a percentage of your original loan amount. On a $200,000 home loan, you would pay:
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Upfront MIP of 1.75% = $3,500 at closing
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Annual MIP of 0.85% = $142 per month
If your loan is $200,000, refinancing to remove MIP would save you $1,704 per year. Over the life of a 30-year mortgage, that adds up to over $51,000 in savings!
Of course, your actual savings will depend on your loan amount, interest rate, and other factors. But for most borrowers, getting rid of FHA MIP can lead to substantial savings each month.
Strategies for FHA Borrowers Who Can’t Yet Refinance
If you don’t yet have 20% equity to refinance into a conventional loan, here are some options to reduce your FHA MIP costs:
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Lower your interest rate – Refinancing your FHA loan could allow you to reduce your interest rate and lower your monthly payments. Shop around for rates.
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shorten your term – Going from a 30-year to 15-year FHA mortgage increases your monthly payment but shortens the MIP duration.
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Make extra payments – Making an extra mortgage payment per year will help you build equity faster. Then you can refinance sooner.
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Improve your credit – Boosting your credit score before applying to refinance will help you qualify for better rates and terms.
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Wait for home value to rise – Appreciation over time will increase your equity so you can eventually refinance.
5 Steps to Remove MIP from an FHA Mortgage
Follow these key steps if you want to cancel the MIP on your FHA home loan:
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Check your loan details – Review your mortgage statement to find your original loan amount, date, term length, and down payment percentage.
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Determine your eligibility – Based on your loan details, see if you qualify to remove MIP based on the FHA guidelines above.
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Check your home equity – For a refinance, you’ll likely need at least 20% equity. Compare your loan balance to your home’s current value.
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Talk to lenders – Reach out to multiple lenders to ask about refinancing from FHA to a conventional loan. Compare interest rates and costs.
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Submit your application – Once you pick a lender, complete their application and submit any required documents to get the refinance process started.
FAQs on FHA MIP Removal
Here are answers to some common questions about canceling FHA mortgage insurance premiums:
Can I remove MIP from my FHA loan without refinancing?
Only if your loan originated before June 2013 and you’ve reached 78% LTV. More recent FHA loans require a refinance to remove MIP.
How much equity do I need to refinance and remove MIP?
Most lenders require at least 20% equity to qualify for a conventional mortgage without PMI. So you’ll need around 20% equity to refinance out of an FHA loan and cancel MIP.
Does a refinance to remove MIP impact my loan term?
Yes, when you refinance you start over with a new loan term. But you can choose to go back to a 30-year term so there’s no impact on monthly payments.
What credit score do I need to refinance out of an FHA loan?
You’ll generally need a minimum credit score of 620-640. But the higher your score, the more likely you are to qualify for better refinance rates and terms.
Can I remove PMI instead by refinancing into a different FHA loan?
Unfortunately, no. All FHA loans require you to pay mortgage insurance for the life of the loan if your down payment is under 10%.
Are there options to remove MIP without refinancing?
Not directly. But you can request a manual appraisal to remove MIP if your home value has increased enough. Or make extra payments to shorten your loan term and pay off MIP faster.
The Bottom Line
Paying mortgage insurance on an FHA loan can get expensive over the long run. If you have at least 20% equity, the simplest way to get rid of MIP is refinancing into a conventional mortgage.
Be sure to compare rates and terms from multiple lenders to find the best FHA-to-conventional refinance option. Removing mortgage insurance will save you thousands of dollars over the life of your home loan.
Understand your options
There are two primary ways to eliminate mortgage insurance from an FHA loan:
If you meet the eligibility requirements to remove MIP from an FHA loan, your mortgage servicer should automatically cancel the premiums once you meet the criteria, assuming you’re in good standing with a record of on-time mortgage payments. If the premiums haven’t been canceled, contact your servicer.
If you qualify and can get a lower interest rate, you might consider refinancing your FHA loan to a conventional loan. Here are a few key considerations:
- Credit score: What does your credit look like now versus what it looked like when you took out your FHA loan? If you’ve improved it, you might qualify for a conventional loan with a better rate and no private mortgage insurance (PMI) if your LTV ratio is 80 percent or less.
- Interest rates: Are current refinance rates lower now than they were when you got your FHA loan? In general, it might make sense to refinance if you can take off half to three-quarters of a percentage point in rate.
- LTV ratio: In addition to how much you’ve paid on your FHA loan, take stock of the value of your home. Is it worth more today due to rising property values or a major renovation?
- Refinance closing costs: You’ll need to pay closing costs to refinance, so do the math: Will the upfront cost of refinancing be worth the savings in the long run? Our mortgage refinance calculator can help you decide.
Step-by-step guide to removing FHA mortgage insurance
“There are a number of factors that come into play when determining whether or not the FHA mortgage insurance can be canceled,” says Alan Aldinger, vice president of Media Relations for PNC Bank. “The biggest factor is when the case number was assigned for a borrower’s current FHA loan.”
Here’s how eligibility for FHA mortgage insurance removal breaks down by loan origination date:
- If your origination date was between July 1991 and December 2000, you can’t cancel your FHA mortgage insurance premiums. You’ll need to keep paying them for the life of the loan, unless you refinance.
- If your origination date was between January 2001 and June 3, 2013, your MIP will be canceled when you reach a loan-to-value ratio (LTV) of 78 percent.
- If your origination date was after June 3, 2013 and you made a down payment of at least 10 percent, your MIP will be canceled after 11 years. For down payments of less than 10 percent, you’ll pay MIPs for the life of the loan, unless you refinance.