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Getting an FHA loan can be a great way for first-time homebuyers to purchase a home with a low down payment However, FHA loans come with mortgage insurance premiums (MIP) that you have to pay for the life of the loan. This extra monthly cost can really add up over time
Luckily, there are a few ways to get rid of MIP on an FHA loan. In this comprehensive guide, we’ll walk through everything you need to know about removing mortgage insurance from your FHA mortgage.
When Can You Cancel FHA Mortgage Insurance?
The rules for cancelling FHA MIP depend on when you originally took out the loan:
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FHA loans from July 1991 to December 2000 – Unfortunately, you can’t cancel MIP on these older FHA loans. The premiums are for the life of the loan. Your only option is to refinance to a conventional loan.
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FHA loans from January 2001 to June 2013 – MIP can be cancelled once you reach 78% loan-to-value (LTV) through payments and home appreciation.
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FHA loans after June 2013 – If you put down less than 10% you’ll pay MIP for the life of the loan. With a down payment of 10% or more MIP cancels after 11 years.
How to Remove MIP from an Eligible FHA Loan
If your FHA loan qualifies for mortgage insurance cancellation based on the origination date and down payment, the process is simple.
Here are the steps:
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Keep making payments – Make sure you make all your mortgage payments on time. You need a good payment history to cancel MIP.
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Check your home value – Request an appraisal or look at comparable sales to confirm your home’s appreciated to the target LTV for cancellation.
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Contact your mortgage servicer – Let them know you meet the requirements to cancel FHA mortgage insurance.
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Confirm the cancellation – Your servicer will review your loan and value of your home. If eligible, they will remove the MIP premium within 30-60 days.
Once cancelled, you’ll see the monthly mortgage insurance payment disappear from your statement! Removing MIP will lower your monthly costs and allow you to save or redirect that money elsewhere.
Refinancing to Remove FHA Mortgage Insurance
If your FHA loan doesn’t qualify for MIP termination, the main option is to refinance to a conventional loan.
Here are some key steps if you want to refinance to remove mortgage insurance:
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Check your home equity – Conventional loans require 20% equity to avoid private mortgage insurance (PMI). If you don’t have 20% equity yet, you may have to keep paying mortgage insurance even after refinancing.
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Improve your credit – The better your credit, the lower rate you can qualify for on a refinance. Pay down debts and dispute errors to boost your score.
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Research refinance rates – Compare current rates to your existing FHA rate. To make refinancing worth it, look for at least a 0.75% lower rate.
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Estimated costs – Factor in closing costs for the refinance, usually 2-5% of the loan amount. Make sure the monthly savings outweighs the upfront fee.
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Apply and choose a lender – Pick a reputable lender and submit a refinance application when you’re ready.
The major benefit of refinancing to a conventional loan is potentially eliminating mortgage insurance if you have 20% equity. Just make sure the math makes sense with closing costs and interest rates for your situation.
Weighing the Pros and Cons of Removing FHA MIP
Canceling FHA mortgage insurance can really save you money each month and over the life of your loan. But before you take action to remove MIP, consider these key pros and cons:
Pros
- Lower monthly mortgage payment
- Allows you to build savings faster
- Frees up money to pay down principal
- Less interest paid over loan term
Cons
- Upfront costs if refinancing
- May still need PMI if less than 20% equity
- Giving up low FHA interest rate
- Time consuming application process
For many homeowners, the pros heavily outweigh the cons when it comes to canceling FHA MIP. But make sure you take a look at your full financial picture and goals before moving forward.
Alternatives if You Can’t Remove FHA Mortgage Insurance
If you don’t qualify to cancel FHA mortgage insurance, here are a couple alternative options to consider:
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Request lower FHA premium – FHA lowered their annual MIP rates in 2015. Contact your lender to see if you can get a lower rate.
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Change loan terms – You may be able to recast or modify your FHA loan to reduce the monthly payments and offset the MIP costs.
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Pay down principal – Making extra payments toward your mortgage principal can help you build equity faster to cancel MIP down the road.
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Sell your home – If all else fails, you may want to consider selling your home and purchasing a new one with better loan terms.
Every situation is different. Talk to a loan officer or housing counselor about your specific options beyond just cancelling FHA mortgage insurance premiums.
FHA MIP Removal Eligibility Checklist
Here is a quick checklist to see if you may qualify to cancel your FHA mortgage insurance:
- Your FHA loan originated after January 1, 2001
- You put down at least 10% as the original down payment
- Your current loan-to-value ratio is 78% or lower
- You have not missed or been late on any mortgage payments
- At least 11 years have passed since getting the FHA mortgage
If you can check all those boxes, you should be eligible to have your MIP terminated by contacting your mortgage servicer. This will remove that extra payment and save you money each month.
FAQs on Removing FHA Mortgage Insurance
Here are answers to some frequently asked questions on getting rid of FHA MIP:
How much does FHA mortgage insurance cost?
FHA loans have an upfront mortgage insurance premium of 1.75% of the loan amount plus an annual premium between 0.45% – 1.05% of the loan amount. Over the life of the loan, you’ll pay thousands in MIP.
Does FHA mortgage insurance go away?
It depends on when you got the loan and your down payment amount. FHA loans after 2013 may have MIP removed after 11 years if you put down at least 10%. Otherwise, MIP is for the life of the loan.
Can I cancel FHA MIP at 78 LTV?
For FHA loans from 2001 to 2013, MIP can be terminated once you reach 78% loan-to-value through payments and appreciation. Contact your servicer to request cancellation.
How long does it take to remove FHA MIP?
After you submit a request to terminate FHA mortgage insurance, it typically takes between 30 to 60 days for your servicer to review and process. Then MIP will be removed from your monthly payments.
Is it worth refinancing to remove FHA MIP?
If you can get at least a 0.75% lower rate by refinancing to a conventional loan, the monthly savings may make it worth paying closing costs to eliminate mortgage insurance. Do the math carefully when considering.
Getting rid of FHA mortgage insurance can be complicated, but this guide covers everything you need to know about cancelling MIP. If you have any other questions, be sure to speak with a loan officer who can review your specific loan situation. With the right approach, removing mortgage insurance could save you thousands!
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.
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