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Are you aware that taking out an FHA loan comes with private mortgage insurance (PMI) payments? The question is, can you get rid of it without having to refinance? This article will go into more detail about how you may be able to eliminate your FHA mortgage insurance without having to refinance.
If you bought your home using an FHA loan, you are paying mortgage insurance premiums (MIP) each month. This limits the lender’s exposure to loss if a borrower fails to make their payments and the lender has to foreclose on the property.
The amount you pay depends primarily on when you got your FHA loan and what your loan amount is. The average premium rate was .45 to 1.05 percent as of December 2021, and the MIP must be paid for the entire loan term, in most cases.
The current upfront premium is still 1.75 percent of the base loan amount. So, let’s say you borrowed $300,000, your upfront mortgage insurance premium would be $5,250, which would be due at closing. This applies no matter what the amortization term or loan-to-value (LTV) ratio is.
Overall, the monthly premium for PMI is often costly. That said, if you have an FHA loan, there is good news and bad news. The good news is that you may be able to get rid of FHA mortgage insurance. You can request cancellation of your FHA mortgage insurance when you meet certain requirements:
The bad news is that if you got your loan after June 2013, you’re stuck with FHA mortgage insurance payments for the life of the loan, which is until you sell the home, pay it off, or refinance to get rid of FHA mortgage insurance premiums for good.
For loans originating prior to June 2013, FHA allows you to drop PMI once the loan balance reaches 78 percent of the original purchase price of the property. If your rate is 3.5 percent, you’ll reach that balance in slightly less than 10 years.
You can drop the FHA mortgage insurance as early as 60 months (5 years), however, by reducing your loan balance to 78 percent. This would mean coming up with cash. How much? If you paid $400,000 for your home and made a 3.5 percent down payment, you’d have to reduce the balance to $306,000. If you’ve had your loan for 3 years, your balance would be $369,000. That means coming up with more than $60,000 cash.
If you don’t have an extra 60 grand lying around, there may still be hope. Since your home is probably worth quite a bit more than when you bought it, you should consider getting a Home Equity Line Of Credit (HELOC) to generate cash. You would be able to drop the $400 a month mortgage insurance premium payment and have a smaller payment on the HELOC—probably around $200 a month or less.
If you got your loan after June 2013, you would have to refinance into a conventional mortgage and have a loan-to-value (LTV) ratio of at least 80 percent or more. You may discover that the rate on a new conventional loan is a bit higher than what you have now, but without the costly burden of mortgage insurance.
Remember all those documents you signed when you bought your home? Dig them out and find the closing statement. This will tell you what you paid for your home and the date you closed escrow. If you closed escrow on an FHA mortgage before June 2013, go to the next step.
Multiply the purchase price by 78 percent. That will tell you the point at which you can drop the PMI—but remember, you can’t drop it earlier than 60 months.
Next, look at your most recent mortgage statement to find the loan balance. The difference between the 78 percent figure you calculated, and the current balance is the amount you would reduce your balance to eliminate your mortgage insurance payments.
Finally, get some idea of your home’s value. This will tell you whether you have enough equity to get a HELOC to pay down your mortgage to the 78 percent level. Your total financing should not exceed 80 percent of the current value.
If you have a loan where you can’t get drop the FHA mortgage insurance, you should look into refinancing into a conventional loan. Although your FHA note rate may be lower than today’s conventional loans, you have to take the permanent mortgage insurance into account. Even if you have a note rate of 3.5 percent, FHA PMI of 1.75 percent gives you an effective rate of 5.25 percent. With conventional loan rates well below 4 percent today, there is plenty of room to improve your position.
Until very recently, there was a quirk in FHA loans that allowed lenders to collect a full month’s interest when the loan is paid—even if you pay them off on the first of the month. If you are refinancing into a conventional loan, plan to close at the end of the month to avoid paying this extra interest.
If your home hasn’t appreciated enough to give you an 80 percent loan to value ratio, there is still hope. If your new loan is more than 80 percent of the home’s appraised value, you will have to pay private mortgage insurance (PMI). PMI is different in that it should be far less costly than the FHA MI you have been paying, and—most important—you CAN drop PMI once you can show that the present value of your property gives you an 80 percent loan to value ratio.
If you’ve decided that a refinance may still be the best way to get clear of FHA mortgage insurance, it’s time to talk with an experienced loan officer.
Whether you’re buying a home or ready to refinance, our professionals can help.
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No Obligation and transparency 24/7. Instantly compare live rates and costs from our network of lenders across the country. Real-time accurate rates and closing costs for a variety of loan programs custom to your specific situation.