fha loans are popular for good reason. help homebuyers get competitive mortgage rates even if they have lower credit scores or higher monthly debt.
but this loan program has a tradeoff: fha mortgage insurance premiums (mips). Someone with a $250,000 FHA loan can expect to pay about $30,000 in mortgage insurance premiums over the life of the loan.
Some fha borrowers can get rid of their monthly mortgage insurance premiums. others will need to refinance into another type of loan to eliminate this additional monthly expense.
see if you can cancel your fha mortgage insurance. start here (October 13, 2022)
what is the fha mortgage insurance premium (fha mip)?
The fha mortgage insurance premium, also known as the fha mip, helps keep the federal housing administration (fha) loan program running.
fha is not a lender; instead, it is an insurance provider for lenders. When you get an FHA loan, your lender provides the money. the fha insures the loan.
then, if you missed payments and the lender had to foreclose, the fha would step in to help cover the lender’s losses.
With this insurance coverage in place, the lender can approve loans even when the borrower has average credit, a low down payment, and a debt-to-income ratio of up to 50 percent.
but it is the borrower who pays the mortgage insurance premiums (mip).
how much does mortgage insurance cost?
Modern FHA home loans charge two types of mortgage insurance premiums:
- upfront mip: This coverage adds 1.75 percent of the loan amount up front. For a $250,000 loan, 1.75% equals $4,375 to be paid as part of closing costs or added to the loan amount.
- annual mip: Most borrowers pay 0.85% of their loan balance each year in annual MIP. For a loan balance of $250,000, 0.85% equals $2,125, which would be divided into 12 monthly payments of about $177 each.
FHA charges a different annual insurance rate for some loans, and we’ll explore those details later. most borrowers pay the 0.85 percent annual rate.
Paying these premiums can be a good deal: they can save more in interest than they cost in monthly installments. still, many borrowers want to get rid of this additional cost.
how do i pay my fha mortgage insurance premium (mip)?
The Federal Housing Administration changes mortgage premium costs and policies from time to time. So how and if you can cancel your fha mip will depend a lot on the age of your loan.
The last major change in FHA MIP policies went into effect on June 3, 2013. This means that loans that closed before June 3, 2013 have different policies.
for fha loans opened before June 3, 2013
if you closed your fha loan before June 3, 2013, you can cancel the annual mip payments on your loan if:
- home loan is current
- your loan balance is equal to or less than 78% of the last fha appraised value, usually the original purchase price.
if you haven’t reached 78% loan-to-value (ltv), continue to make regular payments and check with your loan servicer.
Borrowers who have already hit the magical 78% LTV can start saving hundreds of dollars on their monthly payments while keeping their existing FHA loan and interest rate intact.
Click here to see if you are eligible to cancel your mortgage insurance (October 13, 2022)
for fha loans opened on or after June 3, 2013
Most homebuyers with newer FHA loans will have a harder time paying off their annual MIP payments. That’s because the FHA made the annual IPM permanent for many borrowers beginning in 2013.
Unless you put down at least a 10 percent down payment on your home, much higher than the 3.5 percent minimum down payment required for most borrowers, you’ll have to pay annual mip payments. until you pay off the loan.
If you make a down payment of 10 percent or more, your mip will go away after you’ve made your loan payments for 11 years.
If you put down less than a 10 percent down payment, you may need a mortgage refinance to eliminate these monthly premiums.
refinancing outside fha mip
If you’ve built up a good amount of equity in your home, refinancing outside of the FHA loan program can eliminate your FHA mortgage insurance premiums.
Most homeowners with fha loans refinance with a conventional loan. Conventional loans are uninsured by the federal government, so borrowers will need stronger credit scores and enough home equity to qualify.
Most conventional lenders require 20% of home equity to refinance loans. That means your current loan balance can’t exceed 80 percent of your property’s value. For a home worth $300,000, you’ll need to pay off your loan balance to $240,000 or less to refinance.
Increasing home values also help you build equity faster, and since prices have been rising, many homeowners will reach 20% equity faster than they would with regular loan payments alone.
Keep in mind that rising home values also help you build equity faster. And since prices have been rising across the country, many homeowners will reach 20% equity faster than they would with regular loan payments alone. If you think you have enough equity to refinance with MIP due to rising home values, your lender can verify this through an appraisal during the refinancing process.
Refinancing won’t always save you money, even if you get rid of fha mip. If your new refinance rate exceeds your current rate, for example, you’ll likely pay more interest on your new loan than you’re paying in mip right now.
Be sure to get at least three loan offers to find the lowest rate possible. It’s also important to know that conventional loans also require mortgage insurance, if you refinance with less than 20 percent equity.
conventional mortgage insurance pmi vs fha
Conventional mortgage loans do not require government mortgage insurance premiums (mip), but they do require private mortgage insurance or pmi.
Unless you make a 20% down payment, or refinance with at least 20% equity in the home, your conventional lender will likely require PMI.
pmi will add additional money to your monthly mortgage payment just like the annual fha mip. pmi may even exceed fha mip rates depending on your credit score, debt load, and home equity.
but, unlike current fha mip policies, it is possible to cancel the pmi on a conventional mortgage.
Once your loan balance drops to 80 percent of your home’s current value, you can apply for PMI cancellation. pmi should automatically cancel when your loan reaches 78 percent of ltv.
can you get rid of pmi with an fha loan without refinancing?
Refinancing requires closing costs that could add 5 percent or more to the cost of your new loan. And, with rising mortgage rates, refinancing could cost even more if you can’t match or beat the rate on your current home loan.
Some fha loan holders can get rid of their mortgage insurance premiums without refinancing. if you:
- Make a down payment of 10 percent or more: Your annual mip will go away on its own after you’ve made payments for 11 years.
- Closing Your Loan Before June 3, 2013: Your annual MIP will go away once you’ve paid off your loan up to 78 percent of your home’s value. if your fha assessed value is $250,000 and your loan balance is $195,000, you can stop paying mip.
But if you deposit less than 10 percent into a loan closed on or after June 3, 2013, your mip will be maintained for the life of the loan. you would need a mortgage refinance, or pay off the loan in full, to stop paying mip.
tips to lower your fha mortgage insurance rate
When shopping for a mortgage, FHA loan program mortgage insurance premiums can seem like a big drawback, especially since the annual mip often lasts for the life of the loan.
but not all borrowers pay the full 0.85 percent annual mip rate over the life of the loan. By shortening the term of your loan to 15 years or making a larger down payment, you can lower your annual MIP rate and term.
for example, if you:
- get a 15-year loan instead of a 30-year loan: your annual mip rate would be 0.70 percent over the life of the loan
- assign a 5 percent down payment to a 30-year loan: your annual mip rate would drop to 0.8 percent over the life of the loan
- assign a 10 percent or more on a loan 30-year loan: You would pay an annual mip of 0.8% over 11 years
- You would make a down payment of 10% or more on a 15-year loan: You would pay an annual mip rate of 0.45% for 11 years
if you borrow more than $625,500, you will see higher annual mip rates. they could be up to 1.05 percent of your loan balance.
is fha mip more expensive than pmi?
When you can afford 20 percent of your home loan, the mip vs. pmi question is easy: You’ll save with a conventional loan that doesn’t require pmi payments when you make a 20 percent down payment.
If you’re making a smaller down payment, the question is more complicated. For some borrowers, the FHA mortgage insurance premium (MIP) costs less than private mortgage insurance (PMI) on a conventional loan.
Unlike fha mip rates that are set based on down payment amount and loan term, private mortgage insurance rates vary by lender and borrower. Annual PMI rates tend to range from 0.5 to 1.5 percent of the loan amount.
A borrower who barely qualifies for a conventional loan, which often means a credit score around 620 and a down payment of at least 3 percent, can save more money with an FHA loan, at despite the initial mortgage insurance premium on the loan of 1.75 percent.
every borrower is different. To see your actual costs, you’ll need to compare loan estimates from a variety of lenders.
four ways to get rid of pmi
the biggest benefit of paying pmi on a conventional loan instead of mip on an fha loan is pmi’s cancellation policies.
The Homeowners Protection Act of 1998 helps ensure borrowers don’t pay PMI indefinitely.
To get rid of pmi on a conventional loan you can:
- Make payments until pmi is paid off: When you have a conventional loan, getting rid of pmi is just a matter of waiting. your lender will cancel pmi once you’ve paid off your original loan balance up to 78 percent of your home’s value
- request cancellation when you reach 20 percent of principal: you don’t have to wait until you’ve reached 78 percent ltv. When you reach 80 percent of LTV, or 20 percent of equity, you’re eligible for PMI cancellation. just ask your loan servicer
- to get a new appraisal: Your home’s value is defined by a home appraisal. If you think your home’s value has increased a lot recently, a new appraisal may show you already have 20 percent equity, enough to pay off PMI. if you don’t request a new appraisal, your lender will likely calculate your principal based on its original value
- refinance if principal has increased: different freddie-backed conventional loan programs Mac and Fannie Mae have different PMI requirements. you could refinance into a program that doesn’t require pmi for your home
There is another way to remove pmi, but it only works for active duty military, military veterans, and some surviving spouses of veterans who died in the line of duty.
VA Cash Out Refinance, which is available only to members of the military community, can help you refinance a conventional loan to a VA loan and will not require any annual mortgage insurance. however, the loan requires an initial financing fee. If you’ve ever served in the military and were honorably discharged, you may be eligible for a loan.
frequently asked questions about the fha mortgage insurance premium
when can pmi be canceled on an fha loan?
fha loans do not charge pmi. Instead, they require MIP, the FHA’s own brand of mortgage insurance premiums. Modern FHA loans require IPM for the life of the loan, unless you make a down payment of 10 percent or more. in that case they disappear after 11 years. for fha loans closed before June 3, 2013, mip is due after the loan balance reaches 78 percent of the home’s value.
what is fha mip?
fha mip is the specific type of mortgage insurance from the federal housing administration. FHA charges two types of MIPs: an initial fee equal to 1.75 percent of your loan amount and an annual fee equal to 0.85 percent of the loan amount for 30-year loans with a down payment of 3.5 percent.
does fha require pmi without a 20 percent down payment?
fha loans always require mip. If you make a 20 percent down payment, you’ll continue to pay MIP up front and MIP annually for at least 11 years. If you make a 20 percent down payment on a conventional loan, you shouldn’t have to pay any PMI.
can the pmi be removed from an fha loan?
mip can be removed from some fha loans. If you make a down payment of 10 percent or more, MIP will expire after 11 years. If you closed your FHA loan before June 3, 2013, your MIP will expire once the loan amount drops to 78 percent of your home’s FHA appraised value.
can i cancel the pmi after 1 year?
Most conventional lenders require PMI until the principal balance on the loan falls to 80 percent of the home’s value. If you can reach this threshold in one year, you can cancel PMI after one year. this is not true with fha loans which require mip for the entire term of the loan for most borrowers.
how soon after shutdown can you remove the pmi?
pmi on a conventional loan does not have a set maturity date. instead, it is required until you pay off the mortgage balance up to 80 percent of the home’s value. you can reach this threshold sooner by making additional payments. The mip on an fha loan, which is similar to conventional pmi, lasts until you pay off the house, unless you make a down payment of 10 percent or more, in which case the mip expires after 11 years.
Do any lenders specialize in fha-to-conventional refinances?
Nearly all lenders offer fha-to-conventional refinances. conventional loans are the most common type of loan for residential real estate.
Can I withdraw cash when canceling mortgage insurance?
It is possible to withdraw cash when refinancing to eliminate mortgage insurance. eligibility to withdraw money depends largely on the equity in your home. you would need to leave 20 percent of your equity in the house. to get a 20 percent withdrawal, you must have 40 percent equity.
how can i get rid of pmi without a 20 percent down payment?
Typical conventional loans require PMI unless you make a 20 percent down payment. However, some lenders will waive PMI in exchange for a higher interest rate. this approach can cost even more than paying pmi, unless you refinance at the higher rate.
how does the fha calculate mortgage insurance (mip)?
all fha loans require 1.75 percent of the loan amount as mip up front. Annual MIP can range from 0.45 percent to 1.05 percent depending on your loan amount, loan term, and down payment amount. If you take out a 30-year loan and make the FHA minimum down payment of 3.5 percent, your annual MIP would add 0.85 percent of the loan amount per year.
does fha mortgage insurance 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 will pay a premium based on your original loan amount for the first year only.
does fha mortgage insurance ever increase?
the fha changes its mip rates from time to time. But these changes apply only to new FHA loans. existing fha loans keep their existing mip policies and rates.
is it worth paying pmi or mip?
yes. To avoid MIP or PMI, you must save a 20 percent down payment. meanwhile, as you save money, home prices may rise. pmi and mip allow you to buy sooner by lowering your down payment goal.
making a plan to get rid of fha mortgage insurance is a big financial decision
When you buy a home, you focus primarily on getting to a place where you can put down roots and build a strong future. The down payment can be a big hurdle, so the high fha pmi costs can be a worthwhile trade-off.
But now that you’re established, you may want to get rid of those FHA mortgage insurance premiums so you can save that money, your child’s college fund, or high-interest credit card debt. Even if you can’t cancel your mortgage insurance now, you can make a plan for how you’ll do it.
Check out today’s rates and start your mip removal refinance here (Oct 13, 2022)