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How to Get Rid of FHA Mortgage Insurance or PMI

One of the challenges of having an FHA loan is that it requires you have mortgage insurance (PMI). People are always asking me, how to get rid of PMI. This is the case for loans with less than 20% equity. It appears that a 15-year term on a FHA mortgage may have a loop hole that helps people eliminate mortgage insurance at 90% loan to value. FHA mortgage insurance premiums were finally reduced in 2017, but many homeowners would rather not pay monthly mortgage insurance if they do not have to.

In 2018, MIP or mortgage insurance premiums became permanent on FHA loans that are originated going forward, this doesn't change FHA mortgages originated in the past, but most home buyers do not want to pay mortgage insurance every month for the life of their loan. This means that refinancing out of the FHA loan into a home loan with no PMI has to be factored in as a goal.

You need to learn from the pros on how to get rid of mortgage insurance or PMI. There are many alternatives to paying FHA monthly mortgage insurance and PMI including lender paid mortgage insurance. If you are searching for a solution to getting rid of PMI, then this a popular alternative.

There are two phases to the private mortgage insurance premium:

  • The upfront mortgage insurance premium of 1.75% that you can wrap into the mortgage.
  • The ongoing mortgage insurance premium that you pay each year which is wrapped into your monthly payment. The typical annual fee is .85% of the borrowed amount.

To learn more about how to cancel PMI on your FHA loan, let's explain a few things in detail:

FHA Mortgages Are Great, But How Do You Get Rid of Mortgage Insurance?

The FHA has done a good job in recent years in making home ownership an option for many Americans with credit problems in the past. Once you close escrow on an FHA loan, one of your primary goals should be to learn how to get rid of mortgage insurance so you can reduce your housing expenses as quickly as possible. FHA-loan requirements have a reputation for being flexible and this financing is guaranteed by the government and allows lenders to offer:

  • 3.5% down payment loans
  • Refinances without any appraisal needed
  • Very low interest rates that often beat conventional rates

While FHA-home loans are really good products with many up sides, the fact is that for the most part, you are stuck with PMI payments as long as you have an FHA loan.

So how to get rid of PMI?

get rid of mortgage insurance

Your Mortgage Insurance or FHA Loan Does Not Have to Be Permanent!

Millions of homeowners may have needed an FHA-mortgage at first to get into their home. But after a certain period of time of paying their mortgage on time, you have options. This is generally the case today because home prices are appreciating in most areas of the country. Getting a new loan without having to mortgage insurance monthly because it usually reduces housing costs significantly. Getting rid of PMI on FHA loan programs is certainly a viable option with the right approach. If you figure how to eliminate PMI or FHA mortgage insurance you will certainly be in a position to reduce your monthly housing expenses.

Here are your options:

Refinance to Get Rid of PMI

Did you know if you refinance you may be able to eliminate monthly MI payments without any FHA mortgage insurance? With home mortgage rates still very low, refinancing your FHA loan can help you to get rid of PMI and possibly reduce your monthly payments. That's a nice deal! Refinancing can work if your house has gained in value since you last got your mortgage. So, if you bought your home three years ago for $100k and you had to borrow $90k, you have a LTV of 90% and you are paying PMI.

Three years later, you paid all of your payments on time and you have decreased what you owe to $85,000. And the value of the property has increased to $112,000 or 4% per year. So, you now owe $85k on a home worth $112k. So, you owe 76% of the value of the property. That is under the 80% loan to value that means you must pay for mortgage insurance. In this scenario, you will be able to refi into another loan and not pay for mortgage insurance.

Some loans will have a requirement for seasoning before you can refi to lose PMI. If your loan is less than two years old, you can ask for a refinance to cancel PMI, but it may not be approved. When you refinance, you will need to consider your closing costs, as that is a substantial upfront cost. If you are saving more than $100 per month, it could well be worth it.

Lender Paid Mortgage Insurance

Ask about lender paid mortgage insurance. In some cases, lending companies want your business so bad they are willing to offer lender paid mortgage insurance. This means you pay a little bit of a higher interest rate, but you will not have to pay mortgage insurance every month any more. Do the math because lender paid mortgage insurance could save you money by lowering your housing expenses monthly. It makes sense to consider the LPMI loan before submitting a FHA loan application.

FHA MI

Obtain a New Appraisal

Some mortgage lenders will consider a new appraisal rather than your original sales price or old appraised value to determine if you meet the necessary 20% equity point to get rid of PMI. It is true that an appraisal can cost up to $500, but you are talking about getting rid of at least $150 per month in payments, so it is worth it.

Prepay Your FHA Mortgage

Another alternative to FHA PMI removal is to adjust your budget to overpay on your mortgage every month. If you can budget to pay $50 to $100 extra per month, this can get you to the required 20% equity threshold faster.

Renovate and Remodel

If you add space to your home or add a pool, you may be able to substantially increase the value of your home. Then you will need to ask your mortgage lender to recalculate your LTV. The Consumer Financial Protection Bureau also requires you to meet several standards to remove your private mortgage insurance:

  • You must ask for PMI removal in writing.
  • You must be current on all mortgage payments and have a reliable payment history for at least the last two years.
  • You must show that you do not have any other loans on your home, such as a home equity line of credit.
  • You may have to pay for an appraisal to show that you loan balance is not above 80% of the home's worth.

Having to pay for mortgage insurance on your FHA mortgage is a necessary evil, but you do not have to do so forever. Hopefully after reading this article you have figured out how to get rid of PMI or FHA monthly mortgage insurance. If you follow some of the above tips, you may be able to drop your PMI payments faster than you think. Then you can use that saved money to pay off your loan even faster than before.

How to Cancel FHA Mortgage Insurance Premium

Why Getting Rid of MIP Can Save You Money

Did you put less than 20% down on your home? Then you probably are paying mortgage insurance. Mortgage insurance is required on mortgages with less than 20% down payment because it is a higher risk for the lender. If you stop paying the mortgage, the lender is reimbursed by the mortgage insurance company.

People who have a conventional mortgage are paying mortgage insurance called PMI, while those with an FHA loan are paying MIP, or mortgage insurance premium. In both cases, this is an extra expense on your monthly mortgage payment to the tune of $100, $200 or more each month. It is no wonder that home owners want to dump PMI or MIP as soon as they can.

FHA loans are great things because they allow a person with a lower credit score and income to buy a home, as long as they can qualify. An FHA loan only requires you to have a 580-credit score, and you can have a recent foreclosure or bankruptcy and still qualify. But one of the issues with FHA loans is the mortgage insurance component. FHA mortgage insurance costs more than conventional loan mortgage insurance. Another problem with it is that for many home owners, it is difficult to cancel mortgage insurance now.

The reason for this is back in 2013, FHA discovered that its reserves it must have by federal law to pay for mortgage defaults was lower than it should be. That is why in June 2013, it made a new rule that all FHA mortgages written from that point on would have to keep mortgage insurance for the life of the loan.

So, in theory, even if you have 50% equity in your property, you would still need to pay for mortgage insurance, even if you are 20 years into the mortgage. They did this because FHA needed to shore up its reserve fund if a financial downturn occurred again and there were a lot of defaults.

While it is understandable why they did this, it is not a great deal for home owners with a lot of equity.

If you have a loan that was approved after June 2013 and you put down 3.5%, you will need to pay mortgage insurance for the entire life of the loan. The one exception is if you put down 10% or more. In that case, you can cancel the MIP after 11 years.

If you got your FHA loan before June 2013, you can cancel your MIP after five years, but anything approved after that is much more restrictive to cancel MIP.

So, if you have an FHA loan and have more than 20% equity, what should you do? After all, home prices are going up in 2018, and it is very common for people to have much more equity in their homes now than a few years ago. For example, the National Association of Realtors reports the median home price in the US was $255,600 in Q2 of 2017. This was more than 6% higher than the year before. Some experts believe we will see at least 10% appreciation in 2018 in most of the US.

If you are in a home that is seeing good appreciation and you have more than 20% equity, the best thing to consider is to refinance out of your FHA loan into a conventional loan. With more than 20% equity, you will not need to pay for mortgage insurance with a conventional loan.

However, we are in a rising interest rate environment. As of July 2018, mortgage rates are in the area of 4.6%. This is almost a point higher than a year ago. If you got an FHA loan when the rates were under 4%, you will probably need to run the numbers to determine if you are better off with the lower interest rate and paying mortgage insurance, than you are with a higher rate and not paying MIP.

Mortgage insurance with an FHA loan is the biggest downside to the program. But if you have good enough credit, you can always refinance into a conventional loan and cancel mortgage insurance. Just run the numbers to ensure that it makes financial sense to do it, and don't forget to factor in your closing cost expenses.

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