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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 conventional loans. However, FHA loans come with an added cost – mortgage insurance premiums (MIP) that you must pay for the life of the loan.
MIP protects the lender in case you default but it adds hundreds of dollars to your monthly mortgage payment. The good news is that you may be able to remove MIP from your FHA loan and stop paying this expensive insurance. Here’s what you need to know about canceling MIP on your FHA mortgage.
What is MIP on an FHA Loan?
MIP stands for mortgage insurance premiums. This is a type of insurance that is required by the FHA to protect lenders against losses if a borrower defaults All FHA loans have an upfront MIP charge of 175% of the loan amount, and an annual MIP of 0.45% to 1.05% of the loan amount.
For example on a $200.000 FHA loan you would pay
- Upfront MIP of 1.75% = $3,500 at closing
- Annual MIP of 0.85% = $141.67 per month ($1,700 per year)
The upfront MIP can be financed into your loan amount. But the annual MIP gets added to your monthly mortgage payments for the life of the loan. This increases your total monthly housing costs significantly.
Removing the MIP from your FHA loan means you’ll stop paying hundreds of dollars per year on this mortgage insurance. Your monthly payments will go down once the MIP is eliminated.
When Does MIP Go Away on an FHA Loan?
Whether and when you can cancel MIP depends on when you got your FHA loan:
FHA loans issued before June 3, 2013
- MIP cancels automatically once your loan reaches 78% loan-to-value ratio
- Usually happens within 5 years of getting the mortgage
FHA loans issued on or after June 3, 2013
- MIP lasts the life of the loan if you put down less than 10%
- MIP lasts 11 years if you put down 10% or more
- Must refinance to remove MIP earlier
As you can see, the MIP rules changed significantly in 2013. If you want to remove MIP from a newer FHA loan, you’ll likely need to refinance into a conventional mortgage.
Refinancing to Remove FHA MIP
The most common way to get rid of MIP on a post-2013 FHA loan is to refinance into a conventional mortgage. Here are the steps:
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Check your home equity – You’ll typically need at least 20% equity to qualify for a conventional loan without mortgage insurance.
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Improve your credit score – Aim for at least a 620 FICO score to qualify for the best refinance rates.
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Get a rate quote – Compare offers from multiple lenders to find the best FHA-to-conventional refinance rate.
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Submit your application – Work with your lender to complete the application process.
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Close on your new loan – After approval, your new conventional mortgage will replace your FHA loan.
The benefits of this type of FHA streamline refinance include:
- Immediately removing FHA MIP and stopping those monthly payments
- Potentially getting a lower mortgage rate
- Option to cash-out equity if your home value has increased
Just make sure to weigh the costs of refinancing against your long-term savings on MIP. Closing costs can range from 2% to 5% of your loan amount.
Lowering Your FHA MIP Payment
If you don’t have 20% equity for a conventional refinance yet, you may still be able to reduce your FHA MIP costs by refinancing to a new FHA loan. Here are two options:
FHA Streamline Refinance
This is the easiest option if you want to refinance your FHA loan but lack the equity for conventional financing. The FHA streamline lets you refinance into a new FHA mortgage with minimal documents and underwriting.
While your new loan will still have MIP for life, you could get today’s lower annual MIP rate of 0.55%. This saves you 0.30% versus older FHA loans with a 0.85% annual MIP.
FHA “Short Refi”
If your original FHA loan was endorsed before May 31, 2009, you may qualify for an FHA Short Refinance. This lets you refinance into a new FHA loan at today’s lower rates while also reducing your upfront and annual MIP rates.
The upfront MIP drops to 0.01% and ongoing annual MIP is just 0.55% with this option. That’s a huge discount compared to normal FHA loan MIP.
Alternatives to FHA Refinancing
Here are a couple other options if you don’t want to refinance your FHA mortgage but are tired of paying the high mortgage insurance premiums:
VA Loan Refinance
If you’re a veteran or surviving spouse, consider refinancing to a VA home loan instead. VA loans don’t require any monthly mortgage insurance. And you can qualify with 0% down.
Conventional 97 Loan
This type of conventional mortgage lets you qualify with just 3% down and no PMI. However, availability is limited based on current market conditions.
Piggyback Mortgage
You may be able to use a piggyback HELOC or second mortgage to cover your down payment. This avoids paying mortgage insurance on your main first mortgage.
Tips for Removing FHA MIP
Here are a few final tips when navigating FHA MIP removal:
- Shop mortgage rates from multiple lenders to find the best deals on a refinance
- Talk to a mortgage broker who can help you compare FHA vs. conventional loan options
- Ask lenders if you qualify for any of the specialty FHA programs like FHA Streamline or Short Refi
- Refinance as soon as you have 20% equity to eliminate MIP – don’t wait!
- Consider a cash-out refinance to tap your home equity if you need funds for other financial goals
The bottom line is that you have options for canceling FHA MIP, even if you don’t originally qualify for automatic termination. Taking the time to explore refinancing or alternative mortgages can help you stop paying mortgage insurance premiums and keep more money in your pocket each month.
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.
Contact your servicer
If your loan isn’t eligible for MIP cancellation, it’s worth contacting your servicer anyway, especially if you’re having trouble making payments. Your servicer can help you explore a loan modification or other options.
How to Eliminate Mortgage Insurance Premium from FHA Loans?
FAQ
Can I get rid of MIP on an FHA loan?
How many years does it take to remove PMI when you have an FHA loan?
At what equity position is MIP automatically removed?
How long is MIP required on an FHA loan?
How do I get FHA MIP removal?
Check your FHA MIP removal eligibility. Start here Start by applying for a refinance with a mortgage lender. Make sure to tell your loan officer that your aim is to achieve FHA mortgage insurance removal by switching from an FHA loan to a conventional loan.
How do I cancel FHA MIP?
You can cancel FHA MIP by either meeting the eligibility criteria or refinancing. If you have an FHA loan, you might be wondering how to get rid of the FHA mortgage insurance premiums (MIP). Unlike conventional loans, FHA loans require you to pay mortgage insurance premiums regardless of the amount of your down payment.
How long does FHA MIP last?
Depending on your down payment, and when you first took out the loan, FHA MIP usually lasts 11 years or the life of the loan. MIP will not fall off automatically. To remove it, you’ll have to refinance into a conventional loan once you have enough equity. How do I get rid of FHA mortgage insurance?
Does FHA MIP go down every year?
If your loan balance goes down — as it should — every year, your FHA MIP will go down, too. This happens because MIP is charged as a percentage of your loan balance. You’ll pay a premium based on your original loan amount only in the first year. Does FHA mortgage insurance ever increase? The FHA changes its MIP rates from time to time.