FHA mortgage insurance removal: A how-to guide

With low down payment requirements and flexible guidelines, FHA loans open the door to homeownership for many buyers. One of the requirements of buying a home with a loan backed by the Federal Housing Administration is paying an up-front and an annual FHA mortgage insurance premium (MIP).

MIP is paid by the borrower and covers the cost of reimbursing the lender in case of default. MIP can add a substantial amount to your monthly mortgage payment, affecting the overall affordability of a loan.

The good news is that there are a few ways to stop paying MIP if you meet specific requirements or by refinancing your FHA mortgage.

How MIP works on an FHA loan

All FHA loan borrowers must pay an up-front and an annual MIP.

The up-front MIP payment is 1.75% of your loan amount and is paid at closing.

The annual MIP payment is calculated based on your loan's average balance for the year, the amount you borrowed, your down payment, and the date you took out your loan.

For FHA loans issued after June 3, 2013, the MIP fee ranges from 0.8% to 1.05% of your balance for mortgages with terms of more than 15 years. The MIP ranges from 0.45% to 0.95% of your balance for mortgages with terms of 15 years or less. If your down payment was more than 10% of the purchase price, you stop paying MIP after 11 years. If you put down less than 10%, you pay MIP for the entire term of your loan.

If you took out an FHA loan before June 3, 2013, the terms are different. Borrowers with a loan term greater than 15 years and an LTV ratio of at least 78% can stop paying MIP after 5 years.

If you took out your FHA loan before January 2001, you cannot cancel MIP.

How to remove MIP from an FHA loan

Your ability to stop paying MIP on an FHA is determined when you close on the loan. Here are the steps to take to determine your eligibility and cancel MIP payments.

Check your eligibility

Your first step is determining your eligibility. You’ll need your loan origination date, which can be found in your mortgage documents or by contacting your lender.

It’s also essential to check your LTV ratio, which shows, as a percentage, how your loan balance compares with your home’s value. LTV is the inverse of home equity, so a 78% LTV ratio is the same as having 22% equity.

Here’s a look at how eligibility breaks down:

Contact your lender

If you meet the requirements of MIP removal, you’ll need to provide your lender with proof of your eligibility. After your lender confirms your eligibility, they’ll cancel your MIP and adjust your monthly payment.

Refinancing to remove MIP

If you don’t meet the conditions to remove MIP or you don't want to wait until you're eligible, you can still remove it by refinancing.

If you refinance from an FHA loan into a conventional loan¹ with 20% equity or more, you avoid both MIP and private mortgage insurance. Refinancing also could get you a lower interest rate, allow you to lower your payment with a longer loan term, switch between a fixed-rate and an adjustable-rate loan, or borrow your equity with a cash-out refinance.

To refinance, you'll need to meet specific requirements, depending on the loan type you're refinancing to and your lender. Generally, you'll need to meet specific income, job history, equity, creditworthiness, and other standards.

Advantages of removing MIP

If you qualify for removing your FHA mortgage insurance premium, it can mean significant financial relief. Eliminating MIP will reduce your monthly mortgage payment and free up money for other goals.

Advantages of refinancing to remove MIP

Refinancing your FHA loan into a conventional loan allows you to avoid MIP entirely, and you also can avoid paying for PMI if you have at least 20% equity in your home.

Refinancing to another FHA loan also can save you money. An FHA Streamline refinance ² has MIP rates of 0.55%, which are lower than MIP rates for an FHA purchase loan.

An FHA cash-out refinance has the same MIP rates as a purchase loan, but allows you to borrow equity with flexible requirements.

FAQ

Here are answers to common questions about removing FHA mortgage insurance.

If I refinance to a conventional mortgage, will I have to pay PMI?

You pay PMI on a conventional loan only if you have less than 20% equity when you take out the loan. If you refinanced 85% of your home's value, you would have to pay PMI.

Can I reduce my mortgage insurance premium without removing it?

Your MIP rate is established by the terms of your loan. You can't change the rate without refinancing.

Can I use a cash-out refinance to cancel my MIP payments?

Yes. If you do a cash-out refinance into a conventional loan with at least 20% equity, you can avoid MIP payments.

The bottom line: Work with your lender to get your MIP removed

If you have an FHA mortgage, removing MIP or refinancing your loan to get rid of it could save you a significant amount each month. Before deciding, it’s important to explore your options and learn how they may affect your long-term financial goals.

If you’re ready to explore your borrowing options, contact Rocket Mortgage today.

¹Refinancing may increase finance charges over the life of the loan.

²The FHA Streamline program may have stricter requirements in some states. In order to qualify for the FHA Streamline program, an immediate .5% minimum reduction in interest and mortgage insurance premium is required. Some states may require an appraisal.