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The FHA loan is a very popular option for many first-time prospective home buyers.
Insured by the government’s Federal Housing Administration, the FHA loan offers attractive terms for borrowers with lower credit scores or limited funds for a down payment.
However, a downside to FHA loans is the requirement for mortgage insurance—specifically the mortgage insurance premium (MIP).
But the great thing about MIP (similar to PMI on a conventional loan) is that you aren’t required to pay it for the entire life of the loan—there are specific ways to eliminate this cost from your monthly mortgage payment.
In this guide, we’ll explore how to get rid of MIP on your FHA loan, diving into the details of FHA mortgage insurance and examining the various removal methods.
Shedding mortgage insurance will help you save money and help you keep more money in your bank account.
Understanding FHA mortgage insurance
Before we dive into how to get rid of PMI, it’s important to understand what it is and why it’s required on FHA loans.
FHA mortgage insurance serves as a safety net for lenders, protecting them in case the borrower defaults. Since FHA loans are designed for borrowers who might not qualify for a conventional loan, the mortgage industry considers them at greater risk of defaulting.
UFMIP vs. MIP
The FHA mortgage insurance is made up of two components or parts: the upfront mortgage insurance premium (UFMIP) followed by the annual mortgage insurance premium (MIP).
The UFMIP is a one-time fee paid at closing, while the MIP is an ongoing monthly cost.
Together, these premiums help protect the lender and enable borrowers with less-than-stellar credit or limited down payment amounts to still secure their mortgage.
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The cost of an FHA mortgage insurance premium (MIP)
The cost of your mortgage insurance premium (MIP) will depend on several factors, including the loan amount, loan term, and loan-to-value (LTV) ratio.
In general, the annual MIP cost ranges from 0.45% to 1.05% of the loan amount, with higher LTV ratios and longer loan terms leading to higher premiums. The UFMIP is typically 1.75% of the loan amount, paid upfront at closing.
It’s important to note that these MIP costs can add up over time, making your FHA loan more expensive in the long run. Unsurprisingly, many borrowers look for ways to eliminate their MIP and reduce their overall mortgage costs.
How long does FHA mortgage insurance last?
The duration of your FHA mortgage insurance depends on several factors—the loan term, LTV ratio, and the date of the loan origination.
Here are some examples:
- For loans originated after June 3, 2013, with an LTV ratio above 90%, MIP is required for the entire loan term.
- If your LTV ratio is 90% or below, MIP is required for at least 11 years.
- For loans originated before June 3, 2013, MIP can be canceled once the LTV ratio reaches 78% and the borrower has paid MIP for at least five years.
How to get rid of MIP on an FHA loan
There is more than one way to get rid of MIP (or PMI on a conventional mortgage).
1. Refinance your mortgage
A popular way to get rid of PMI or MIP on an FHA loan is to refinance your mortgage. Through refinancing, you’re essentially taking out a new loan to pay off the existing one, which can come with new terms and potentially a lower interest rate.
Suppose you’re able to refinance into a conventional loan. In that case, you may be able to eliminate your MIP entirely, as conventional loans typically only require PMI if your LTV ratio is above 80%.
2. Reach 78% LTV
Another way to remove PMI from your FHA loan is to reach a 78% loan-to-value ratio (LTV). This threshold means your remaining loan balance is 78% or less of your home’s current value.
Once you reach this point, you may be eligible to have your MIP removed, provided you’ve met the other requirements for MIP cancellation. Keep in mind that this method only applies to loans originated before June 3, 2013.
3. Request removal of MIP
Finally, you can request the removal of MIP from your FHA loan. However, this option is only available for loans originated before June 3, 2013, and there are strict requirements that must be met.
These include having a loan-to-value ratio of 78% or lower, having paid MIP for at least five years, and having a good payment history.
Steps to calculate your loan-to-value ratio
Calculating your loan-to-value ratio is crucial for determining eligibility for MIP removal. To calculate your LTV ratio, follow these steps:
- Determine your current loan balance by reviewing your mortgage statement or contacting your lender.
- Obtain an estimate of your home’s current value, either through a professional appraisal or by researching recent sale prices of comparable homes in your area.
- Divide your current loan balance by your home’s estimated value and multiply the result by 100 to get your LTV ratio.
For example: If your current loan balance is $180,000 and your home is worth $250,000, your LTV ratio would be 72% ($180,000 / $250,000 * 100).
The benefits of removing PMI from your FHA loan
There is likely a reason that you want to remove MIP payments from your loan. Other than saving money, let’s look at a few reasons.
Lower monthly mortgage payments
Eliminating your MIP can significantly reduce your monthly mortgage payment, providing you with more disposable income and financial flexibility.
Faster equity growth
With lower monthly payments, you may be able to pay more toward your principal balance, helping you build equity in your home more quickly.
Improved loan terms
Refinancing your mortgage to remove MIP can result in better loan terms, such as a lower interest rate or a shorter loan term.
Alternatives to FHA loans without mortgage insurance
If you’re considering a mortgage and would like to avoid mortgage insurance altogether, there are alternatives to FHA loans:
- Conventional loans with a 20% down payment: By putting down at least 20% on a conventional loan, you can avoid PMI entirely.
- VA loans: If you’re a veteran or active-duty military member, you may be eligible for a VA loan, which does not require any mortgage insurance.
- USDA loans: For borrowers in rural areas, USDA loans offer low-interest rates and no mortgage insurance requirement, although they do have an upfront guarantee fee.
Navigating your FHA loan and PMI removal journey
Understanding how to get rid of MIP on your FHA loan is essential for homeowners looking to save money and better manage their mortgage payments.
By refinancing or reaching a 78% LTV ratio, you can potentially lower your monthly payments and improve your overall financial situation.
Don’t forget to consider alternatives to FHA loans if you’re open to the idea of a new mortgage, and stay proactive in managing your mortgage payments and insurance.
If you’re interested in lowering your monthly mortgage payments, either through eliminating PMI or refinancing your mortgage, reach out to Homefinity.
Our highly-experienced loan officers can walk you through your options to save money or find the best mortgage solution for your situation.