Figuring out how to get rid of PMI (private mortgage insurance) on an FHA loan can be confusing, so we’ve done the research to make it easier to understand. But first, please understand one important fact: FHA loans do NOT carry PMI. Instead FHA loans may have a Mortgage Insurance Premium (MIP). The two insurance types are not the same and are regulated very differently, with different rules and stipulations. Again: FHA loans can only carry MIP, not PMI — it’s a common misconception about mortgage insurance that is worth clarifying before we dive deeper…
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PMI, or private mortgage insurance, only exists on conventional loans, whereas mortgage insurance on an FHA loan is referred to as MIP, or mortgage insurance premium. Although the terms are often used interchangeably, using the correct terminology can help avoid confusion about the type of loan you’re seeking if you do end up speaking with a lender.
|Mortgage Insurance Premium
|For FHA loans only
|Private Mortgage Insurance
|For non-FHA loans (ie: private lender like banks or credit unions)
With that said, there are a number of factors that will determine whether mortgage insurance (MIP) can be removed from an FHA loan, including when your loan was initially opened, whether you have sufficient equity in the home, and how much cash you put down when you first bought the house.
A loan’s FHA mortgage insurance premium can easily amount to several hundred dollars a month, and these premiums only protect the lender if you stop making payments. Since it offers no benefit to you as the borrower, removing it from your loan will help get you a lower monthly payment for your mortgage loan. Additionally, if you want to remove PMI from your mortgage, you may want to know how to pay less mortgage interest each month.
If you’re interested in getting rid of mortgage insurance on an existing FHA loan, continue reading on as we’ll dive into the details of what you’ll need to know.
What’s the difference between PMI and MIP on an FHA loan?
PMI applies only to conventional loans that have a down payment of less than 20%. Lenders typically sell conventional loans to either Fannie Mae or Freddie Mac, who each have their requirements for when PMI is needed. MIP on the other hand, applies to FHA loans.
So what is the purpose of PMI or MIP? Both are designed to protect lenders in the event a borrower is unable or unwilling to make payments, and will typically be required on higher-risk loans. Monthly mortgage insurance premiums can easily amount to several hundred dollars a month, and because it offers no benefit to you as the borrower, is something you should try to have removed as quickly as possible to lower your monthly mortgage payments.
Determining how much equity you have
The rules for determining whether you can get rid of FHA mortgage insurance premiums can be complicated, but one of the items that may affect your eligibility is the amount of equity you have in the home. In many cases, you’ll need to pay down your loan to at least a 78% loan-to-value (LTV) ratio.
To figure out your LTV ratio, take the value from the last FHA appraisal report. This is often the appraisal from when you initially purchased the home. You’ll then take your mortgage balance, and divide it by either that appraised value or your home’s purchase price, whichever is lower. The resulting figure is the LTV ratio that may be used.
What was your home’s initial down payment?
Your home’s initial down payment amount is the difference between the original purchase price and the original loan amount. This is another key piece of information you may need in order to determine whether you can remove MIP from your loan. We’ll dive into more details later, but if you had at least a 10% down payment and got your FHA loan after June 3, 2013, MIP can be removed after 11 years’ worth of payments.
If you don’t remember the initial down payment amount, you can find this out from the final documents you signed before you got the keys to the house. You can also try contacting the original lender, title/escrow company, or your real estate agent for assistance.
When was your FHA loan originated?
Finally, to determine whether it’s possible for mortgage insurance to be removed from your FHA loan, you’ll need to know when the loan was opened. FHA loans opened between July 1991 and December 2000 have MIP that cannot be removed. If this is the case and you want to get rid of the mortgage insurance premiums, your only option would be to refinance to a new loan altogether.
If your loan was obtained between January 2001 and June 3, 2013, mortgage insurance can be removed once your loan balance is paid to 78% of the home’s original purchase price. In some cases, you may also need to have also been paying mortgage insurance premiums for at least 5 years.
Lastly, if your loan was opened after June 3, 2013, it’s possible to cancel FHA mortgage insurance after 11 years, but it will depend on the down payment you initially made.
If you fall into one of the circumstances above where it is possible to remove mortgage insurance, continue reading, as there are some nuances and additional requirements depending on when your loan originated.
Loans Originated Between July 1991 and December 2000
As previously mentioned, if you have an FHA loan that originated between these dates, the only way to remove the monthly mortgage insurance is to pay off the loan by doing a mortgage refinance. If you’re interested in removing PMI via mortgage refinancing, continue reading as we provide several options you can look into.
Loans Originated Between January 2001 and June 3, 2013
FHA loans originated between January 2001 and June 3, 2013, can have the mortgage insurance removed depending on 4 items: the length of the loan, how long you’ve been paying the mortgage insurance premiums, whether you’ve paid it down to 78% LTV, and the initial down payment you made when you obtained the loan.
Simply put: if you have an FHA loan term of more than 15 years, have been paying it for at least 5 years, and have an LTV ratio of 78% or less, PMI can be removed from the loan.
FHA loans of 15 years or less have the same criteria, minus the 5-year requirement.
FHA Loans Originated After June 3, 2013
For FHA loans originated after June 3, 2013, it is much simpler to determine when the MIP can be removed. If you made at least a 10% down payment when you bought the home, MIP can be removed after 11 years. Otherwise, it will remain until the loan is paid off or refinanced.
What if I can’t remove FHA mortgage insurance?
If you fall into one of the circumstances where you cannot remove FHA mortgage insurance from your current loan, you can still get rid of it by refinancing to another loan program that does not require mortgage insurance.
Different types of programs have their own pros and cons, along with unique eligibility requirements. Here are a few types of loans you can consider if you don’t want to refinance with the same lender.
Unlike FHA, VA, and USDA loans, a conventional mortgage is a loan that is not backed by a government organization. To avoid mortgage insurance on a conventional loan, you’ll need to have at least 20% equity in your home. Lenders will typically order a new appraisal to determine your home value. Conventional loans can be highly competitive on interest rates and fees for borrowers who have high credit scores and a steady history of income and employment. (Note: there are such things as bank statement mortgages, but we highly recommend against that if you can.)
If you have qualifying military service and are eligible, a VA loan can be a great option to consider. VA loans require no mortgage insurance, and lenders may also offer lower rates on these loans since they are lower risk, being backed by the VA themselves. VA guidelines can also be less strict, require less documentation, and offer more flexibility in underwriting requirements.
If you need a loan that exceeds conforming loan limits, you’ll need to find a lender that offers jumbo loans. The Federal Housing Finance Agency (FHFA) provides information on what the conforming loan limits are, as it could vary depending on property type and location. For 1-unit properties, loans exceeding $647,200 or $970,800 for high-cost areas will require a jumbo loan.
Since jumbo loans involve larger loan amounts and therefore a greater amount of risk to the lender, you’ll usually have to provide more documentation to support your ability to repay the loan. The interest rate on these loans will also tend to be slightly higher than conventional mortgages.
What if the new lender still requires PMI?
If you’re trying to refinance but are told you’ll still have PMI payments, there are a few options you have. First, consider if the PMI that would be charged on the new loan would be less than what you’re currently paying. If so, it could still be beneficial to go through with the refinance, even if you’re not able to get rid of PMI entirely.
Secondly, consider if the new loan would make it easier to cancel PMI. For instance, eliminating mortgage insurance on conventional loans is typically far simpler than it is for FHA MIP. As long as an appraisal shows you are at an 80% LTV or lower, you can stop paying PMI. Unlike FHA mortgage insurance removal, there are no caveats on things like when your loan was opened, what your initial down payment was, or your loan term.
Lastly, you could also try disputing the lender’s valuation of your home.
Dispute the lender’s appraisal of your home
Most lenders will have an appraisal done on your home to determine if they will require PMI and what your loan-to-value ratio is. A certified appraiser will inspect the home, and then find similar homes that have recently sold to arrive at an opinion of value for your house.
You should review the appraiser’s report to confirm they are comparing your house to homes with similar characteristics. In some cases, there may be more similar homes that the appraiser may not have used. It’s also possible that the appraiser may be using the wrong information for your home or missing some features or upgrades that would increase its appraised value.
If you can’t qualify for another loan, consider another FHA refinance
If you’re not able to get approved for a refinance to a non-FHA loan like a conventional mortgage, you could consider a refinance to another FHA loan to reduce the amount of MIP you’re paying. The Federal Housing Administration has adjusted mortgage insurance rates throughout the years, so if your FHA loan was obtained at a time when the MIP rates were higher, you could stand to save some money by refinancing into another FHA loan today.
As an example, an FHA loan obtained in June 2013 would have had a MIP rate of 1.35% annually. Today, that rate has dropped to 0.85%, a savings of 0.50%. This means that for every $100,000 borrowed, you could save $50 on MIP payments.
How to increase home equity and value
You can increase the equity and wealth in your home by conducting home repairs, improvements, or paying down the loan balance. Now if you do have the cash available, you’ll probably be better off paying down the principal balance of your mortgage. This is because paying for home improvements rarely results in an equivalent increase in value, so you’ll get the most bang for your buck by paying down your loan’s principal balance instead.
But if you are already considering some home improvements or repairs, you could get the most bump in value by doing things like landscaping, remodeling the bathrooms, or updating light fixtures.
Here are some more details on how to build equity with home improvements.
Benefits of removing FHA mortgage insurance
By removing private mortgage insurance from your loan, you’ll be able to use that money for things that benefit yourself instead of the lender. You can increase monthly savings for your rainy-day fund, invest more to take advantage of compound interest, save for your kid’s college education, or pay for home improvements.
As one example, studies show that saving early and taking advantage of compound interest can make a huge difference. Investing $10,000 today and letting it grow for 30 years at an 8% growth rate would yield nearly $110,000. However, waiting just another 10 years to invest would leave you with just under $50,000.
The bottom line is that if you can remove MIP from your FHA loan, it’s best to do so as soon as possible.
Removing FHA mortgage insurance
The process to remove private mortgage insurance from your FHA loan can be a confusing process because of the number of items that can affect your eligibility. However, the monthly savings can be well worth your time.
Even if you cannot completely get rid of mortgage insurance, you can still reduce the amount you pay for it by refinancing to another type of loan, such as a conventional loan.