Many first time homebuyers will discover that they have to pay for something called “mortgage insurance”. This adds up to your monthly mortgage payment and is often an unpleasant surprise. This is especially true if you’re seeking an FHA loan, which is structured for families with less money or poorer credit than those who take out a conventional mortgage. Fortunately, you can eventually remove FHA mortgage insurance from your monthly payments, but a refinance may be required if you’ve taken out a mortgage since 2013. Consider speaking with a financial advisor if you need help planning a home purchase. .
What is mortgage insurance?
Mortgage insurance is a financial product that protects your lender in the event that you default on your mortgage. The insurance company will pay your bank any remaining balance on the loan if you end up defaulting.
Mortgage insurance has become an increasingly popular feature of the housing market in recent years. Typically, lenders order this product when a home buyer has a down payment of less than 20%.
As home prices continue to rise, mortgage insurance has moved from a relatively specialized product to a central part of the housing operation – And it’s not cheap. Mortgage insurance can range from 0.5% to 2% of the original mortgage annually. For FHA loans, the government recently lowered premiums by 30 basis points – from 0.85% to 0.55% – per year for most homebuyers.
If you are ready to match up with local advisors who can help you achieve your financial goals, then let’s start.
PMI vs. FHA Mortgage Insurance
There are two main types of mortgage insurance: PMI and MIP.
Homebuyers who take out a conventional mortgage from private lenders are charged a Private Mortgage Insurance Fee, or PMI. As mentioned above, lenders usually require this for any mortgage when the down payment is less than 20%. While they generally disappear automatically once your home equity reaches 22%, you can ask your lender to remove the fee once you reach the 20% equity threshold.
Mortgage insurance premiums, or MIP, are what you’ll pay if you have an FHA loan. These mortgages usually have lower down payment requirements than a traditional loan, and often have lower credit requirements as well. They aim to help first-time and low-income buyers purchase a home. While these loans are backed by the government, they are issued and administered by third-party lenders.
Unlike traditional mortgages, which require mortgage insurance only if the down payment is less than 20%, FHA loans always require a MIP. You must pay a down payment of 1.75% of the total mortgage, and then an annual installment. And unlike private mortgage insurance, this doesn’t always lapse once you reach a certain equity value.
How to remove FHA mortgage insurance
In some circumstances, you can remove the MIP from your monthly payments, and there are two main ways to do this: cancel the MIP and refinance.
MIP cancel
For many homeowners, this can be difficult due to changes in FHA regulations. Your options for canceling the MIP depend on when the loan was withdrawn.
If you got your loan before the year 2000, you cannot apply for MIP cancellation.
If you took out your loan between 2001 and 2013, you can apply for a MIP cancellation if:
Note that this process should be done automatically. If it doesn’t, contact the lender to apply specifically for it.
If you got your loan after 2013, you can apply for MIP cancellation if:
Unfortunately, you will not be eligible at all to cancel the MIP if you took out a mortgage after 2013 and made a down payment of less than 10%. Mortgage insurance and all associated expenses will be a permanent part of your loan.
Refinancing
The FHA mortgage program has strict requirements and many borrowers will not become eligible for MIP cancellation based on the terms of their original loan. In this case, the best alternative is generally to consider a conventional mortgage refinance.
The advantage of refinancing is the complete termination of the FHA loan. You can take out a new mortgage and use it to pay off the existing loan, effectively shifting the nature of your loan from one lender or product to another. However, refinancing generally comes with all the requirements of a conventional mortgage. especially:
-
Relatively high credit scores, usually mid-60s and up
-
20% minimum equity in the home to avoid PMI
-
closing costs
To refinance, you usually won’t need to make a new down payment, but the lender will want to see great equity in the home. Depending on your particular circumstances, that can mean as little as 10%, or even 5% in some cases, but if you have less than 20% equity in the home, private mortgage insurance is likely required. This is not the worst option, as the PMI can be removed once you reach 20% equity, but it is important to keep in mind.
Beyond that, you will need a higher credit score to refinance than to secure an FHA loan. This process will also include closing costs, which are typically 2% to 5% of the loan amount. This can make refinancing an excellent decision if you intend to stay in your home for some time, so the savings outweigh the costs. If you are likely to move in the foreseeable future, make sure you don’t factor your insurance benefits into the initial expense.
minimum
Every FHA loan comes with mortgage insurance, or MIP. If you take out your mortgage anytime after 2013, you can take it out as long as your down payment is large enough. Otherwise, your only option is to refinance.
Home buying tips
-
Setting and sticking to a budget is an important part of the home buying process. SmartAsset has tools specifically designed to help you see what you can afford and what your mortgage payments will look like. And if you’re not sure whether you should continue renting or buying a home, try our rent-to-buy calculator.
-
Buying a home is a big step, so it pays to have a financial professional in your corner to give you advice. Finding a financial advisor doesn’t have to be difficult. The free SmartAsset tool matches you with up to three vetted financial advisors serving your area, and you can interview your own advisors at no cost to determine which one is right for you. If you’re ready to find a counselor who can help you achieve your financial goals, get started now.
Image credit: © iStock.com/sturti, © iStock.com/designer491, © iStock.com/fizkes
The post How to Remove FHA Mortgage Insurance first appeared on the SmartAsset blog.