Question: I bought a home with FHA financing. We have a monthly insurance premium (MIP) with each payment. How do we get rid of this cost?
Answer: When you bought your home you purchased with little money up front, perhaps 3.5 percent down. This means a lender put up as much as 96.5 percent of the purchase price. This is a high-risk situation for lenders because they greatly prefer 20 percent down.
With FHA, what you have is not a loan from the government but a form of insurance for the lender. You can borrow with little down, but you have to pay for the insurance coverage — the mortgage insurance premium or MIP.
You may or may not be able to end the MIP. Here are three points.
First, if you have sufficient equity you may be able to refinance without any form of mortgage insurance. Generally, you must have equity equal to 20 percent of the property or more. Speak with lenders for specifics.
Second, if your FHA loan has a case number assigned after June 3, 2013, new HUD policies state that mortgage insurance must remain in effect for the life of the loan if you purchased with less than 10 percent down. If you bought with more than 10 percent down the insurance must remain in effect for at least 11 years.
Third, for an FHA mortgage closed on or after January 1, 2001 or has a case number issued before June 3, 2013 then the opportunity to cancel your mortgage insurance premium remains in place.
HUD states as follows:
“Effective for all loans closed on or after January 1, 2001, FHA’s annual mortgage insurance premium will automatically be canceled-once the unpaid principal balance, excluding the upfront MIP, reaches 78 percent of the lower of the initial sales price or appraised value based on the initial amortization schedule and pursuant to instructions contained in ML 00-38. Although the annual mortgage insurance premium will be canceled as described, the contract of insurance will remain in force for the loan’s full term. This mortgage insurance premium cancellation provision applies only to loans insured under the Mutual Mortgage Insurance (MMI) fund. The MMI fund does not include mortgages on condominiums or Section 203(k) rehabilitation loans, among others.”
In other words, if you had a $100,000 FHA mortgage originated between January 1, 2001 and before June 3, 2013 then to discontinue the payment of monthly mortgage insurance premiums the balance must be less than $78,000. Speak with lenders for specifics.