An FHA loan sounded like a good idea at the time.
Now, not so much. That’s what many FHA home buyers are saying.
The reason: high mortgage insurance premiums, month after month and year after year. In fact, someone with a $250,000 FHA loan can expect to pay about $30,000 in mortgage insurance premiums. The good news is that you can cancel your FHA mortgage insurance and you can start today.
There are two methods of removing your FHA mortgage insurance, commonly known as FHA MIP.
Method #1 to Get Rid of FHA Mortgage Insurance: Check your Loan Balance.
You can request cancellation of your FHA mortgage insurance when you meet certain requirements.
- The loan is in good standing
- The loan was opened prior to June 3, 2013
- You’ve paid your loan for 5 years if you have a 30-year loan. If you have a 15-year loan, there’s no 5-year minimum.
- Your loan balance is at or below 78% of the last FHA appraised value, usually the original purchase price.
If you bought a house with an FHA loan some years back, you may be eligible to cancel your FHA PMI today. If your loan balance is 78% of your original purchase price, and you’ve been paying FHA PMI for 5 years, your lender or service must cancel your mortgage insurance today — by law.
While a low balance is a sure-fire way to cancel FHA mortgage insurance, it can take a while to get there. On a 30-year fixed FHA loan, it will take you about ten years to pay your loan down to 78% of the original purchase price. If you’re not quite there, continue making payments for a few more years, or make a one-time principal payment.
Once you hit the magical 78% loan-to-value ratio, you can potentially start saving hundreds per month, and keep your existing FHA loan and interest rate intact.
Getting Rid of FHA Mortgage Insurance, Method #2: Refinance out of it
Cancelling FHA mortgage insurance is also possible by refinancing into a conventional loan. It’s often the quickest and most cost-effective way to do it. And it can be the only way to do it if you opened your FHA loan on or after June 3, 2013, when FHA mortgage insurance became non-cancellable.
With today’s rising home values, homeowners might be surprised how much equity they have. With a refinance, you can use your home’s current appraised value rather than the original purchase price.
Replace FHA mortgage insurance with conventional PMI
Conventional private mortgage insurance, or PMI, has to be paid for just two years, then is cancellable. Converting your FHA mortgage insurance to conventional PMI is a great strategy to reduce your overall cost. Conventional PMI is usually much cheaper than FHA mortgage insurance, and you can cancel it much more easily.
You can often refinance into a conventional loan with as little as 5% equity.
When your new conventional loan balance reaches 78% of the home’s value, you can cancel conventional PMI. Some lenders and servicers will even let you cancel when you reach 80% of your home’s current value.
In as little as two years, you could be rid of mortgage insurance forever. Compare that with a minimum of five years for FHA, and a maximum of 30 years if your FHA loan was opened after June 3, 2013.
Get rid of FHA mortgage insurance today with a loan that doesn’t require PMI
If your home has about 20% equity based on today’s value, you can cancel your FHA mortgage insurance using a conventional refinance, often within 30 days, and you can start here today by completing a short online form.
You might have more equity than you think. Some areas of the country like Phoenix and Las Vegas have seen 20% to 30% appreciation over the past few years. Use your new-found equity to discontinue your FHA mortgage insurance. Refinance into a new loan that does not require mortgage insurance of any kind, and do it immediately.
For instance, if you purchased your home for $200,000 with an FHA loan, and the home is now worth $250,000, there’s a good chance you can remove your FHA mortgage insurance now.
Canceling FHA MIP with a VA Loan
If you have military experience, you might qualify for a VA refinance. A VA loan doesn’t require monthly mortgage insurance.
Another great benefit is that you don’t need equity in your home to refinance. In some cases you can be qualified for a loan at up to 100% of your home’s current value.
Making a Plan to Get Rid of FHA Mortgage Insurance is a Great Financial Decision
When you’re buying a home, you’re mainly focused on getting into a place where you can set down roots and build a solid future. You probably weren’t too concerned about high FHA PMI costs.
But now that you’re settled in, it’s time to think about getting rid of FHA mortgage insurance. These high monthly costs could and should be going into savings, a child’s college fund, or toward loan principal.
Don’t delay. Even if you’re not able to cancel your mortgage insurance now, make a plan for how you’re going to do it.
Ten or twenty years down the road, you’ll be glad you did.
Check Today’s Rates on FHA MIP Cancellation Loans
Rates have been hovering around 11-month lows recently. Homeowners who want to eliminate their FHA mortgage insurance should check rates and lock in a refinance before rates rise.
It’s possible to keep a similar rate or even drop your rate when you refinance out of FHA. You could save a lot of money every month in interest and mortgage insurance. Click here to get started.
Tim Lucas (NMLS #118763), Editor Tim Lucas is a licensed loan officer with over 12 years of experience as a loan originator, processor, and team manager. Get a live rate quote for your home purchase or refinance at MyMortgageInsider. Visit Tim on Google+, Twitter, and Facebook.