How to Get Rid of PMI on an FHA Loan
If you put down less than 20% on a conventional home loan, your lender will charge you private mortgage insurance (PMI) in addition to the principal and interest portions of your mortgage payment. It protects them if you ever default.
If you take out an FHA loan, you have to pay a mortgage insurance premium (MIP) regardless of your down payment size. It serves the same purpose as paying PMI, but there are some significant differences.
One of the most notable is that you can request to cancel PMI on a conventional loan once you reach 20% home equity, but getting rid of MIP on an FHA loan is more complicated. Here’s how it works.
Can You Cancel FHA MIP?
Whether or not you can cancel your FHA mortgage insurance premium (MIP) depends on several factors. The most significant is your loan origination date. That’s the day you received your mortgage and interest began accruing on the loan balance.
The second primary factor to consider is your initial down payment on the property. Putting down extra never lets you avoid MIP entirely, but it can help you get out of it sooner.
If you have both of those data points, here’s what you should know to determine when you can cancel your FHA loan’s MIP.
Unfortunately, if you received your mortgage proceeds between July 1, 1991, and December 31, 2000, then there’s no way to cancel your MIP. You have to pay it for the rest of the life of the loan.
However, the outlook is brighter if you took out your loan between January 1, 2001, and June 3, 2013. In these cases, your lender should automatically cancel your MIP when you reach 78% of the loan to value (LTV) ratio.
Think of LTV as the inverse of your equity percentage. For example, if you put down 10%, your initial LTV is 90%. Once you pay down your mortgage and reach 22% equity, your LTV is 78%, at which point you won’t have to pay MIP anymore.
Finally, if you received your mortgage on or after June 3, 2013, your MIP’s cancellation depends on your down payment. If you put down at least 10%, then they’ll cancel it after 11 years. If not, it’ll last the life of your FHA loan.
Note that the Federal Housing Administration sets these rules, not your lender. They have to follow the letter of the law if they want the FHA to insure the loan. As a result, there’s no use in trying to convince them to budge.
How To Get Rid of MIP
FHA loans are a great financing option for many would-be homeowners, especially those who might struggle to qualify for loans with more demanding credit score requirements.
However, MIP is an especially burdensome form of mortgage insurance. Not only is it impossible to avoid entirely and more difficult to get rid of than other types, but it’s also more expensive.
All FHA loan borrowers pay 1.75% of their base loan amount upfront, and the recurring monthly payments range from .45% to 1.05% per year.
In comparison, there’s no upfront cost for PMI on conventional loans, and annual fees average .58% to 1.86%. Meanwhile, a VA loan has neither.
As a result, getting rid of your MIP as soon as possible can save you a significant amount of money. Here are your two options for doing so.
1. Refinance Into a Conventional Loan
The traditional way to get out of mortgage insurance on any government-insured home loan is to refinance into a conventional mortgage when you hit 20% equity. It’s a strategy that works regardless of your loan type, origination date, and down payment.
For example, say you buy a $300,000 house in 2020 with an FHA loan. You put down 5%, which equals $15,000. Because of your loan origination date and down payment, you’d pay MIP for the life of the FHA loan.
Six years later, you’ve paid down the mortgage balance by $30,000, and the home value has appreciated by $20,000. As a result, you have $65,000 of equity in a house that’s worth $320,000, which is just over 20%.
At that point, you could refinance into a conventional loan. You’d pay off your FHA loan in full, terminating the MIP. Because your new conventional loan would start at less than 80% LTV, you wouldn’t have to pay private mortgage insurance either.
Note that while refinances will get you out of your recurring mortgage insurance payment, they’re not free. You’ll usually pay closing costs of roughly 2% to 5% of the remaining principal balance.
For example, if you refinance from an FHA loan into a conventional loan after paying your balance down to $250,000, you can expect to pay somewhere between $5,000 and $12,500 for the privilege.
Make sure you consider these costs when deciding whether or not to refinance, as they can diminish or wipe out the benefit you’d receive from eliminating MIP. Don’t be afraid to shop around with different lenders to get the best deal possible.
2. Put 10% Down So It Expires After 11 Years
The other primary option for getting rid of FHA mortgage insurance is to put down at least 10% upfront. If you do, your lender should automatically cancel your MIP after 11 years, regardless of your equity in the property.
However, that only works if your loan origination date is after June 3, 2013. If you entered into an FHA loan before then, there’s nothing you could’ve done to influence the length of your MIP payments. Your lender will either cancel it at 78% LTV or not at all.
If you’ve already purchased a house with an FHA loan and are eligible for MIP cancellation after 11 years, make sure you do the math to determine whether it makes more sense to wait it out or refinance.
Remember to factor your new interest rate and potential closing costs into your calculations. Your credit score has likely improved since you took out your loan, so shop around for a good deal.
If you haven’t bought a house yet and are considering using an FHA loan to do so, it may be best to wait until you can afford to put down 10% so that you have access to both MIP removal options.
Saving up a higher down payment can be difficult, but it pays off. In addition to getting out of MIP at 11 years, it lets you qualify for an FHA loan with a credit score as low as 500 instead of 580 and reduces your annual MIP rate.
One great way to save for a down payment and build credit at the same time is with a credit builder loan. Credit Strong customers add 70 points on average to their FICO score in just 12 months and finish with an extra $1,000 in cash. Give it a try today!
If you don’t have time to improve your score before buying your home, you can still get a mortgage. Find out How to Buy a House With Bad Credit.
Can You Remove Mortgage Insurance Premiums From an FHA Loan Without Refinancing?
Unfortunately, it’s only possible to remove the mortgage insurance from an FHA loan without refinancing if your loan origination date is after January 1, 2001.
If you received your loan between then and June 3, 2013, your mortgage lender should cancel your MIP once you reach 78% LTV. If you received or plan to receive an FHA loan after that, the MIP will expire after 11 years as long as you put down at least 10%.
Other than these two scenarios, there’s no way to remove the mortgage insurance from your FHA loan without refinancing. Your MIP will continue for the duration of the loan term.
That said, you shouldn’t be afraid to refinance. In fact, even if you know that your MIP will expire after 11 years, it’s often better to refinance anyway since you can eliminate your MIP significantly earlier that way.
For example, say you buy a $200,000 house and put down $20,000, which equals 10%. On a 30-year fixed mortgage with a 3.5% interest rate, you would need about five and a half years to reach 20% equity.
That means you could refinance and get out of your MIP six years earlier than if you waited for it to expire. If your property value appreciates, you could do so even sooner.
Of course, in addition to eliminating your MIP early, refinancing can also reduce your interest costs.
If your credit report shows that you’ve been making your monthly payment on time all those years, your credit score has likely gone up, so you have a good chance of qualifying for a better mortgage rate on your second mortgage.
How Long Do You Have To Have PMI on an FHA Loan?
The length of time you have to have FHA PMI or mortgage insurance premium (MIP), depends on your loan origination date and initial down payment size
If your loan origination date is between July 1, 1991 and December 31, 2000, then you have to pay your MIP for the life of your loan. There’s no way to get out of it except to refinance into a conventional loan when you hit 20% equity.
If your loan origination date is between January 1, 2001 and June 3, 2013, your lender should automatically cancel your MIP when you reach 78% loan to value, which is equivalent to 22% equity.
Finally, if your loan origination date is on or after June 3, 2013, your lender will cancel your MIP if you put down at least 10% after 11 years of paying MIP. Otherwise, it’ll last the life of the loan.
Can PMI Be Removed if Home Value Increases?
Private mortgage insurance is the mortgage insurance you pay on conventional loans, and the Homeowners Protection Act lets you request that your lender stop it when you hit 20% equity. Even if you don’t, they must cancel it automatically at 22% equity.
Whether you reach those thresholds by paying down your mortgage or through property appreciation doesn’t matter, so yes, you can remove PMI because your home’s appraised value increases.
MIP is the mortgage insurance you pay on FHA loans. Unfortunately, only FHA loans with origination dates between January 1, 2001, and June 3, 2013, are eligible for MIP cancellation based on the home’s value.
If you received your FHA loan between those dates, your lender should cancel your MIP once you hit 78% LTV, just like a conventional loan. Again, you can remove MIP from these FHA loans through home value appreciation or principal paydown.
Does FHA Require PMI Without 20% Down?
If you take out a conventional mortgage and put down less than 20% of the home’s original value, you’ll have to make PMI payments until you reach that threshold. MIP, the equivalent of PMI for FHA loans, is unavoidable regardless of your down payment size.
Even if you put down more than 20% on an FHA loan, you’ll have to pay mortgage insurance upfront and for at least the first 11 years of the loan. However, your lender will cancel it after that, as long as you receive the loan after June 3, 2013.
If you don’t have the money for a deposit, you can still get a mortgage, even with bad credit. Find out How to Buy a House with No Money Down and Bad Credit.
Are There Lenders That Specialize in FHA-to-Conventional Refinances?
Yes, some lenders specialize in refinancing FHA loans into conventional loans. Because MIP on FHA loans is difficult to get rid of, borrowers often want to make that switch when they hit 20% equity.
That said, you don’t need to work with a specialized FHA loan servicer. Any lender that offers conventional loans will happily help you refinance out of an FHA loan if you’ve made each monthly mortgage payment on time and have good credit.
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