With an FHA loan, mortgage insurance premiums (MIP) are unavoidable. But there are ways you can eventually ditch those payments for good.
Signing up for an FHA loan means agreeing to pay mortgage insurance premiums (MIP)—that’s just the way it is.
Here’s the good news: As you build up your home equity, you can take action to get rid of MIP.
This blog will guide you through what mortgage insurance is, why MIP is required on an FHA loan, and most importantly, what you can do to drop mortgage insurance from your monthly payment.
Five Things You Need to Know About Mortgage Insurance
So, what is MIP?
Government-backed FHA loans can be an ideal choice for borrowers of all kinds. They help put homeownership within reach for those who have little cash saved up for a down payment or have imperfect credit history.
An FHA loan is a great option for first-time home buyers because of the lower down payment and credit score requirements: You can put down as little as 3.5% for a fixed-rate loan with a credit score as low as 580.
But the flexibility of FHA loans comes with a tradeoff. You’ll need to pay mortgage insurance on an FHA loan, regardless of your down payment. Mortgage insurance protects the lender in case you default on the loan.
MIP includes a fee that you’ll pay at closing, as well as annual premiums that are a part of your monthly mortgage bill.
The upfront premium is 1.75% of the loan amount. Don’t worry if you can’t afford to pay this at closing —you can finance it into your overall loan.
Your annual MIP costs will depend on your loan amount, your down payment size, and the length of your mortgage term. Lenders calculate your annual payment as a percentage of your base loan value, and most add your annual MIP to your monthly mortgage payment.
MIP includes a fee that you’ll pay at closing, as well as annual premiums that are part of your monthly mortgage bill.
What’s the difference between MIP and PMI?
You may have heard of mortgage insurance through another name: PMI. Both MIP and PMI are forms of mortgage insurance, but there are key differences between the two.
Conventional loans, which are not insured or guaranteed by any government agency, may require you to pay PMI, or private mortgage insurance. If you provide a down payment of less than 20% on a conventional loan, you’ll pay PMI as a monthly premium to a private insurer.
Paying PMI isn’t ideal, but it can help a home buyer get the loan they need without having to save up a 20% or greater down payment.
While PMI is provided by private insurance companies, the FHA handles the MIP that FHA borrowers pay.
How can I get rid of the MIP payments on my FHA loan?
If you’re looking to purchase a home or you’ve been living in your home for a while now, you’re probably wondering what you can do to eliminate potentially thousands of dollars worth of monthly MIP payments from your bill.
Here are a few factors you’ll need to consider if you want to make that happen:
1. When did you get your FHA loan?
If you took out your FHA loan before June 2013, you may be able to cancel MIP. To be eligible, you need to have 22% equity in your home, and have made your payments on time.
If you purchased or refinanced with an FHA loan on or after June 3, 2013, with a down payment of less than 10%, MIP will last for the life of the loan.
2. What was your down payment?
These days, FHA lenders no longer cancel your MIP once you reach a certain home equity percentage. The amount of time you’ll have to pay MIP depends on your down payment.
If you put down 10% or more at closing, you’ll pay MIP for 11 years before you can cancel. If you put down less than 10%, you’ll need to pay MIP for the entire term length.
The amount of time you’ll have to pay MIP on an FHA loan depends on your down payment. If you put down 10% or more at closing, you’ll pay MIP for 11 years before you can cancel.
3. Do you intend on refinancing?
Many homeowners like to refinance their loan to take advantage of a lower interest rate or get cash out.
By switching from an FHA loan to another loan, such as a Conventional loan, you could also be eligible to cancel your mortgage insurance payments.
To refinance to a Conventional loan, you need to meet your lender’s minimum requirements. Conventional loan requirements are stricter than those of an FHA loan: You’ll need to have a FICO score of at least 620, and maintain a debt-to-income ratio of 50% or less.
You should have at least 20% equity in your home before you refinance your FHA loan. If you refinance before you reach 20% equity, you’ll need to pay PMI instead of MIP until you reach that threshold.
Want to avoid MIP altogether?
If you really don’t want to pay MIP, you may want to consider buying your home with a different loan.
Thinking of living in a rural area? You could finance a home purchase with a USDA loan. USDA loans don’t require a down payment, and you won’t need to pay PMI or MIP.
If you’re a current or former member of the armed forces or a qualifying spouse, you could consider a VA loan. There’s no down payment requirement, and you don’t have to pay any monthly mortgage insurance on a VA loan.
What’s the bottom line?
When you take out an FHA loan, you’ll be required to pay an upfront mortgage insurance premium at closing as well as annual premiums, divided into 12 monthly payments.
The amount you pay depends on the size of your loan and your down payment. If you have a larger down payment, you’ll pay less each year.
You can’t avoid MIP payments, but you can take steps to lessen their impact. If you put down at least 10% on your FHA loan, you’ll only need to pay MIP for 11 years. If you put down less than 10%, you’ll pay MIP for the entire loan term.
However, you can refinance your FHA loan to another loan type to eliminate the need for mortgage insurance payments.
Want to learn more about FHA loans? Contact us today through one of our experienced loan originators, who can walk you through your options, including how you can get rid of MIP on an FHA loan permanently.
Have any other questions about mortgage insurance, MIP or PMI? Let us know over on Facebook or Twitter!
