Paying that mortgage bill each month can be painful, especially when you look at its breakdown and see that a portion of your payment is going toward mortgage insurance. For FHA borrowers who make less than a 20 percent down payment, that is a requirement you’ll have to deal with for a number of years; for some borrowers, depending on when the loan originated, you could be required to pay that insurance for the entire life of the loan.
No matter which situation you’re in, however, now is a great time to consider your FHA mortgage insurance cancellation options. Here’s what you need to know about how to cancel PMI (private mortgage insurance), and take some of your hard earned money back.
What exactly does FHA mortgage insurance cancellation entail?
First off, you should know what FHA mortgage insurance, or FHA MIP, is all about. The idea is that paying this monthly fee helps reduce risk for lenders who provide mortgages to home buyers who make a low down payment of 3.5% – the minimum for FHA loans.
Before June 3, 2013, borrowers could cancel FHA MIP once the loan reached 78 percent of the original value of the house, or after five years. For those borrowers, there is a light at the end of the proverbial tunnel.
Anyone who borrowed after that date, however, won’t have an end in sight. That’s because FHA MIP is payable for the life of the loan if the down payment was less than 10%. That includes most FHA buyers, who are attracted to the 3.5% minimum down payment.
For the few FHA borrowers whose loans were in the 10 – 20 percent down payment range, the mortgage insurance must remain in effect for 11 years.
So for most cases, borrowers have to proactively cancel FHA mortgage insurance by other means like refinancing into a conventional loan. Here are some reasons why taking either of those routes now can turn out to be a great financial decision for your future.
1. PMI is costing you a fortune and it doesn’t have to.
Paying mortgage insurance premiums is akin to throwing money away. It doesn’t add any value or equity to your home, but you still have to pay it year after year. And we’re not talking the price of a daily cup of coffee either. FHA MIP (mortgage insurance premiums) can add up to a significant expense on top of your already pricey mortgage. The typical monthly FHA MIP cost on a $150,000 loan, for instance, is $167. On a $350,000 loan, it’s $390. That’s real money. That’s a car payment.
The premium does go down with the loan principle (1.35% of the loan principle per year), however, it takes years to pay down the principle enough to really have an effect on the monthly premium.
Someone who buys a 250,000 home this year will still be paying over $200 per month for FHA MIP in 10 years.
2. Equity gains might have made you a good candidate.
Although the housing market took a hit a few years back, home values are once again on the rise. These recent equity gains could mean that you own more equity in your home than you thought, and therefore, you could request PMI cancellation. This option will only apply to those who purchased their homes before June 3, 2013, however. If you think the real estate values in your area have improved enough to put your loan balance close to the 22 percent equity that’s required to cancel PMI, then it’s worth a look.
To request cancellation of your FHA mortgage insurance based on an increase in equity, here’s what is required:
- Your loan must be in good standing, meaning you pay your bill on time every month.
- You’ve been paying your loan for at least 5 years.
- Your loan balance is at or below 78% of the last FHA appraised value (usually the original purchase price).
If you meet these requirements, it’s the law that your lender must cancel your mortgage insurance. If you haven’t reached the 78 percent equity mark but are close, you could opt to make a one-time principal payment to speed up the process.
Going this route allows you to keep your existing FHA loan, but can potentially lower your monthly payment by hundreds of dollars because there will be no more PMI tacked on.
3. Interest rates are low making refinancing a smart move.
For those who purchased homes after 6/3/13, your only option for FHA MIP cancellation is to refinance out of your existing mortgage, since the insurance requirement cannot be removed. The good news is by refinancing into a conventional loan, you could take advantage of the historic low interest rates, and remove PMI for good, assuming you have 20 percent or more equity in your home.
It should be noted that the equity will be based on today’s value (not the original purchase price), so a new lender will require an appraisal to determine the home value. Keep in mind that the value might have changed drastically since you purchased your home. If you’re lucky, it’s gone up either because of the market’s turnaround, or because of home improvements you’ve made.
Should you qualify for a refinance into a conventional loan, try not to delay since home loan interest rates are expected to begin rising in 2015.
Remove FHA mortgage insurance soon.
If you’re an FHA borrower who is approaching a 20 or more percent equity in your home, consider a solution that allows for FHA mortgage insurance cancellation. Whether it’s by request or via a complete refinance into a conventional loan, if cancelling PMI is a possibility, every month you wait is costing you money.