How Do We Get Rid of the FHA Mortgage Insurance Premium?
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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 MIP.
There are two ways to end FHA MIP payments. You could refinance with a new loan – this would end the MIP payment but only makes sense if you have at least 20 percent equity so that the new loan does not require either the FHA MIP cost or private mortgage insurance (MI).
Or, you can reduce the loan balance to 78 percent of the original principal amount.
Specifically, here’s what HUD has to say:
“In the past, some FHA borrowers have paid annual mortgage insurance premiums throughout the life of their mortgages. Effective for all loans closed on or after January 1, 2001, FHA’s annual mortgage insurance premiums will be automatically canceled under the following conditions:
“For mortgages with terms more than 15 years, the annual mortgage insurance premiums will be canceled when the loan to value ratio reaches 78 percent, provided the mortgagor has paid the annual mortgage insurance premiums for at least five years.
“For mortgages with terms 15 years and less and with loan to value ratios 90 percent and greater, the annual mortgage insurance premiums will be canceled when the loan to value ratio reaches 78 percent, irrespective of the length of time the mortgagor has paid the annual mortgage premiums.
“Mortgages with terms 15 years and less and with loan to value ratios of 89.99 percent and less will not be charged annual mortgage insurance premiums.”
For details, speak with current and prospective lenders.
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Syndicated originally by Content That Works and posted with permission.
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