Mortgage Daily

Published On: December 23, 2022

How Can I Cancel My FHA-Insured Mortgage?

The FHA mortgage insurance premium (MIP) is temporary, despite what you may have heard. Some homeowners can allow their mortgage insurance to lapse, while others must refinance to eliminate it.

With mortgage rates remaining below the historical average and property values on the rise, many homeowners are opting to refinance.

Eliminating FHA MIP is a major development. Refinancing allows you to determine your eligibility for a new, PMI-free mortgage.

When May PMI on an FHA Loan Be Dropped?

  • Wait for MIP to expire – If you made a minimum 10% down payment when you purchased your house, your FHA MIP expires after 11 years.
  • Refinance into a conventional loan – The FHA’s MIP requirement is eliminated if you replace your FHA loan with a conventional loan. This is the sole option for FHA MIP reduction if you have less than a 10% down payment.

The good news is that home values are increasing across the country. Even if they’ve just owned for a few years, many FHA homeowners have enough equity to refinance into a conventional loan and cancel mortgage insurance.

A lender can verify your FHA removal eligibility.

How Long is FHA MIP in Effect?

Most existing FHA loans fall into two categories: those with case numbers issued before June 3, 2013, and those with applications submitted after that date.

Your FHA MIP cancellation will rely on this date, as FHA rules have changed at this time.

Modern FHA mortgages feature a simpler MIP schedule. MIP expiration is contingent upon the quantity of your down payment.

How to Eliminate FHA Mortgage Insurance

FHA mortgage insurance payments need not be permanent. You need only adequate credit and sufficient equity to refinance into a conventional loan.

In December 2021, according to the National Association of Realtors, the median house price in the United States was $358,000. That was 15.8% more than the previous year.

This added value implies that more homes may refinance out of FHA immediately.

When homeowners attain 20% equity based on the current value of their house, they can refinance into a conventional loan that does not require mortgage insurance.

Automatic Elimination of FHA Mortgage Insurance

If you obtained your FHA loan before June 3, 2013, you were eligible for MIP cancellation after five years if you acquired your loan before that date.

However, you must have 22 percent equity in the home and timely payments.

For homeowners with FHA loans granted on or after June 3, 2013, the current loan-to-value ratio must be 80% or less to refinance into a conventional loan.

The loan-to-value ratio (LTV) is another method for calculating home equity.

If you owe $160,000 on a property worth $200,000, your LTV would be 80%, as the loan total ($160,000) represents 80% of the home’s value ($200,000).

An LTV of 80% indicates that you have 20% equity in your house, which should be sufficient to refinance into a conventional loan without PMI.

Refinancing to Eliminate FHA MIP

The majority of FHA homeowners share the following loan characteristics:

  • Opened on or after June 3, 2013
  • Less than 10% of the initial deposit
  • 30-year mortgage

These FHA mortgage loans do not qualify for the automatic cancellation of mortgage insurance.

You must refinance your FHA loan to avoid paying mortgage insurance costs.

The good news is that there are no limitations on converting an FHA loan into a conventional loan without PMI. In addition, FHA loans have no prepayment penalties, so you may refinance whenever you choose.

You will need around 20% house equity for this. To determine home equity, deduct the current mortgage balance from the home’s valuation.

Most lenders also need a minimum credit score of 620 to refinance into a conventional loan. The greater your credit score, the greater your potential savings on your monthly mortgage payment.

How to Do a MIP Removal Refinancing

The refinancing procedure is uncomplicated. Apply to a mortgage lender. Inform your loan officer that you would like to refinance into a traditional loan and cancel MIP.

The lender will then determine your eligibility for a conventional loan without PMI. This entails:

  • A new house evaluation to determine the current property’s worth
  • A comprehensive evaluation of your credit score and credit history
  • Verification of your work and income

If you are eligible for traditional financing, your lender will assist you with the remainder of the application and approval process.

After the closing of your refinance, your current FHA loan is replaced by the new conventional loan. And you are no longer required to pay mortgage insurance premiums.

In addition, you may be eligible for a reduced interest rate through the refinancing procedure if your finances are solid enough to qualify for a better rate.

Can PMI on an FHA Loan Be Eliminated Without Refinancing?

It may be feasible to remove your FHA mortgage insurance cost without refinancing. But only if you obtained your mortgage before 2013 or made a 10% down payment when you purchased your property.

  • If you obtained an FHA loan between January 2001 and June 3, 2013, your MIP will be eliminated when your home equity reaches 22%.
  • If you made a down payment of at least 10% and obtained an FHA loan after June 3, 2013, your MIP will be eliminated after 11 years of payments. If you put less than 10% down, coverage continues until the loan is paid off.

If your MIP does not expire on its own, you must refinance your FHA loan to erase its MIP.

Even if your MIP is set to expire in a few years, refinancing might save you hundreds of dollars, especially if you can reduce your interest rate.

Reduce Your FHA Mortgage Insurance Rate

It is acceptable that only some qualify for typical refinancing. Even if you cannot eliminate your FHA mortgage insurance, you can reduce your premiums.

You may have a greater MIP rate than is currently accessible, as these rates have declined since 2015.

Here is a history of the Federal Housing Administration’s FHA MIP rates:

  • Before January 2008: 0.50 percent annual MIP
  • October 2008: yearly MIP of 0.5%
  • April 2010: 0.55% annual MIP
  • October 2010: yearly MIP of 0.90
  • April 2011: 1.15% annual MIP
  • April 2012: 1.25 percent yearly MIP
  • April 2013: 1.35 percent yearly MIP
  • January 2015: annual MIP of 0.85%

For example, if you secured a loan in January 2013, you could refinance into the current MIP and save $40 per month for every $100,000 financed. Additionally, you may save much more if you obtain a reduced mortgage rate.

Note, however, that the MIP on your new FHA loan will become non–cancellable. This is because the origination date of your new loan is after June 2013, when FHA MIP guidelines changed.

Reduced Upfront and Monthly Mortgage Insurance Premiums for Selected Refinancing Homeowners

If you obtained your FHA loan before May 31, 2009, an FHA Streamline Refinance might provide you with lower MIP rates. And your prior upfront payment may be used for your new upfront payment.

Eligible applicants get an annual MIP of 0.55 percent (the norm is 0.85 percent) and a reduced upfront MIP of 0.01% (the norm is 1.75 percent).

That’s an upfront savings of $3,480 and a monthly savings of $50 on a $200,000 loan.

Three months of flawless payment history are required to qualify.

FHA Mortgage Insurance vs. Conventional PMI

The apparent benefit of traditional PMI is that it automatically expires; no refinancing is required for PMI cancellation. This is not the case with FHA MIP, though.

However, many homebuyers continue to select FHA and its mortgage insurance since it may be more cost–effective, particularly for those with a lower credit score.

FHA loans with 15 years or fewer are eligible for an annual MIP as low as 0.45%.

In addition, FHA loans demand an upfront mortgage insurance payment (UFMIP) equivalent to 1.75 percent of the loan amount.

You may be eligible for a partial FHA MIP return if you refinance within three years into another FHA loan.

How to Eliminate Conventional Private Mortgage Insurance (PMI)

If you have a traditional loan with private mortgage insurance, you have additional alternatives to cancel mortgage insurance (PMI).

You only need to wait for your PMI coverage to expire. The Homeowners Protection Act of 1989 requires lenders to abolish traditional PMI when the loan-to-value ratio reaches 78%.

Many homebuyers choose a conventional loan since PMI decreases, whereas FHA MIP does not go on its own – until you make a 10% or greater down payment.

Remember that most mortgage lenders base the 78% LTV on the most recent appraisal value, not the initial purchase price.

If the value of your property has increased significantly, contact your existing loan servicer to determine the conditions for prepayment.

The servicer may request a new assessment or utilize its internal valuation techniques to estimate the current market worth of your home.

With refinancing, you may also eliminate traditional PMI coverage.

The appraisal for your refinancing loan provides evidence of the property’s present worth. You will only pay new PMI fees if your loan amount is at least 80 percent of your home’s current value.

FHA Mortgage Insurance FAQ

What Is MIP on FHA Loans?

FHA MIP is the program that provides mortgage insurance for FHA loans. It consists of a one-time fee of 1.75 percent of the loan amount and a monthly premium in your mortgage payment. This insurance coverage protects FHA lenders, allowing them to provide competitive interest rates on FHA loans despite a modest down payment and mediocre credit.

Does FHA Mandate PMI Without a 20% Down Payment?

Private mortgage insurance (PMI) is needed for traditional loans with less than a 20% down payment. However, FHA rules are different. Regardless of the down payment size, a mortgage insurance premium (MIP) is required for all FHA loans. Even so, you will be required to pay FHA mortgage insurance if you put down at least 20 percent.

Can PMI Be Eliminated From FHA Mortgages?

Once the loan-to-value ratio exceeds 78%, conventional mortgages are exempt from mortgage insurance (PMI). But eliminating FHA mortgage insurance is an entirely other matter. FHA MIP typically lasts 11 years or the life of the loan, depending on the down payment and the date the loan originated. MIP will not automatically expire. Once you have sufficient equity, you must refinance into a conventional loan to eliminate it.

How Can I Cancel FHA Mortgage Insurance?

If your FHA loan originated before June 3, 2013, you can cancel your mortgage insurance. These older FHA loans qualify for MIP cancellation when the loan balance reaches 78% LTV or less. If your FHA loan originated on or after June 3, 2013, you do not qualify for cancellation of FHA mortgage insurance. However, if you have at least 20% equity in your house, you can refinance into a conventional loan without PMI and eliminate MIP. Veterans may also investigate VA loan alternatives.

Are There Specialized Lenders for FHA-To-Conventional Refinances?

Through refinancing, any lender that offers conventional loans backed by Fannie Mae and Freddie Mac can help you cancel your FHA MIP. Any FHA-approved lender can assist you in lowering your monthly payments with an FHA Streamline Refinance loan. Shop around to find the lowest prices. Although most U.S. lenders provide conventional and FHA loans, their rates may vary.

Can Cash Be Withdrawn During a Mortgage Insurance Removal Refinance?

Cash-out refinancing can be used for any purpose, from credit card debt repayment to house upgrades. Conventional cash-out loans permit you to withdraw up to 80% of your home’s equity. If that amount exceeds your current balance, you can keep the excess cash and avoid PMI. Also available is an FHA cash-out refinancing. It permits loans of up to 80% of your home’s worth. Nevertheless, you will continue to pay FHA mortgage insurance. Therefore, it is prudent first to evaluate the traditional version.

How Can I Eliminate PMI Without a 20 Percent Down Payment?

If you now pay PMI or MIP mortgage insurance, you can eliminate it by refinancing after your home’s equity reaches 20%. When searching for a new mortgage, seek choices that do not require PMI, even with a 20 percent down payment. These include piggyback loans, mortgage insurance paid by the lender, and customized mortgage programs that do not require PMI.

FHA Mortgage Insurance Premium (MIP) Calculation

Nearly all FHA borrowers pay the same rates for mortgage insurance. This comprises an up-front mortgage insurance payment (UFMIP) of 1.75 percent of the loan amount and an annual mortgage insurance premium (MIP) of 0.85 percent of the loan amount. This surcharge, payable yearly, is divided into 12 monthly installments and applied to your mortgage payment. On a loan amount of $200,000, MIP would increase your monthly payment by $141.66.

Does FHA Mortgage Insurance Decrease Annually?

FHA mortgage insurance premiums do not decrease annually. But your premium payments do. Because mortgage insurance premiums are computed depending on the loan amount, this is the case. Therefore, if your loan balance decreases annually, so does the amount you pay for mortgage insurance.

Could FHA Mortgage Insurance Premiums Rise?

FHA may at any time increase mortgage insurance premiums. However, your current MIP will remain the same. As long as you maintain your original FHA loan (and do not refinance into a new FHA mortgage), you will continue to pay your original mortgage insurance rate for the duration of your MIP obligation.

Is Having a PMI or MIP Payment Worth It?

Mortgage insurance is frequently worthwhile. This is because FHA loans with MIP allow you to purchase a home with a much smaller down payment than you could otherwise. And FHA loans are extra lenient about credit. Therefore, if you cannot qualify for a mortgage without MIP, it may be prudent to pay mortgage insurance for a few years. You will begin accumulating equity sooner. Once you have 20 percent equity, you can refinance into a conventional mortgage without PMI.

How Can I Get Started?

Contact a lender and get a rate quote. A mortgage quote includes a check for eligibility and a possible estimate of the current home value.

Obtain a quotation and start eliminating your FHA MIP immediately.

 

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