While a home’s listed value is just part of the total cost, interest rates and other costs like FHA mortgage insurance may rapidly add up to the monthly payments. If you have a mortgage insured by the Federal Housing Administration, you may be wondering how to remove FHA mortgage insurance.
An FHA mortgage is a popular choice, particularly for first-time buyers. Due to the lenient financial requirements, many are able to qualify despite debt or low credit scores.
However, the FHA loan comes with its own set of advantages and disadvantages. Aside from restrictions on how much you may spend and not being able to utilize the loan to buy a second property, there are additional costs associated with it.
What Is FHA Mortgage Insurance?
Mortgages typically come with mandatory private mortgage insurance (PMI) if you make a down payment of less than 20% of the total value of the house. Mortgage insurance is an additional fee paid to lenders who take the risk of lending you money. Insurance lowers the financial risk to the lender if you stop making payments and default on the loan.
Once your conventional mortgage balance reaches 80% of your home’s original value, you can ask your lender to cancel your mortgage insurance. With FHA loans, you’ll still need to pay FHA mortgage insurance, or MIP. This insurance applies regardless of the amount of your down payment, and canceling it can be difficult, if not impossible — however, in certain circumstances, you are able to remove it.
How Long Do You Have To Pay FHA Mortgage Insurance?
The FHA mortgage insurance is set by state guidelines rather than lenders, which has changed several times over the years. The current policy states that if you put down less than 10%, you must pay throughout the entire loan amount, whereas if you put down at least 10%, you can stop paying after 11 years of successful payments. Though the length still depends on the amount borrowed.
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FHA Mortgage Insurance Cost
There are two types of mortgage insurance premiums that FHA borrowers must pay: one upfront at the time of closing and another yearly for as long as the loan is repaid.
There is an upfront mortgage insurance premium (UFMIP) of 1.75% of the loan amount, which is usually included in your closing expenses, and an annual premium ranging from 0.45 – 1.05% of the loan principal that varies depending on these three factors:
- The entire loan amount.
- The loan term (typically 15, 20, or 30 years).
- The loan-to-value (LTV) ratio of the loan, which is the loan principal divided by the value of the property.
In certain circumstances, UFMIP will vary from 1.75%, specifically in some refinancing cases (0.01%), Hawaiian home lands (2.344 – 3.80% depending on the loan term), and native lands.
More on the exact FHA mortgage insurance cost can be found in this FHA MIP chart.
How To Get The Upfront FHA Mortgage Insurance Refunded
Many people are unaware that you may be able to get the upfront FHA mortgage insurance (currently at 1.75%) refunded in the form of a credit under certain conditions. Specifically, when you refinance your FHA loan into another FHA loan, such as the FHA Streamline, within three years after closing on your FHA loan.
The amount reimbursed decreases monthly by 2% until it becomes non-refundable after three years. It begins with an 80% refundable MIP one month after loan closing and progresses to a 10% refundable MIP 36 months after closing until it reaches the completion of the 36th month.
However, it’s not being refunded in terms of being sent a check, but rather being able to use the amount already paid towards your next FHA loan that you just refinanced.
For example, if you paid a total of $8,750 MIP on a loan of $500,000 (500,000 x 0.175 = 8750) and tried to refinance your loan into another FHA loan after 10 months equaling 62% reimbursement, equaling $5425 (8750 x 0.62 = 5425).
If your refinanced loan after 10 months is now $450,000, your new MIP would equal $7,875 (450,000 x 0.0175 = 7875).
With this reimbursement, you’d only have to pay $2,450 (8750 – 7875 = 2450). Think of this as being able to pay it forward to your refinanced loan instead of having to pay a large MIP again. This benefit is only valuable if you refinance within a few months of closing on the loan.
How to Remove FHA Mortgage Insurance
There are two ways to remove the FHA mortgage insurance from your monthly expenses:
- If you make at least a 10% down payment, it will fall off after 11 years
- Refinance your loan into a conventional loan, which would only be possible if you:
- Have a credit score of at least 620.
- Have a debt-to-income (DTI) ratio under 45%.
- Accumulated at least 20% equity, without it, you’d be required to pay PMI after refinancing. However, the minimum down payment required for conventional loans is 3%.
Because rules have changed over the years, this may also depend on when your loan originated.
If your origination date falls between July 1991 and December 2000, you can’t cancel your FHA mortgage insurance premium. If your loan originated between January 2001 and June 3, 2013, MIP will be canceled once you reach an LTV ratio of 78%. If it originated between June 3, 2013, and today, then your FHA mortgage insurance will disappear once your mortgage is paid in full or after 11 years if you made a down payment of at least 10%.
Explore Your Options With Total Mortgage
FHA mortgage insurance is one of the few disadvantages that may be avoided after a certain period of time, making the FHA loan a valuable opportunity for first-time purchasers to enter the real estate market. There are also ways to avoid or remove FHA mortgage insurance in certain situations.
Be sure to explore Total Mortgage’s loan program options when you’re ready to purchase a home. If you have any questions about your mortgage options, schedule a meeting with one of our mortgage experts.
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