Want to Cancel Your FHA Mortgage Insurance Premiums?

By
Mortgage and Lending with HomeTown Lenders

Here’s How

As compared to conforming loans and jumbo mortgages, FHA-backed loans are great for a lot of reasons.

FHA mortgages allow purchases with low downpayments; they allow refinances without appraisal; and FHA mortgage rates are often pretty low.

One place where FHA mortgages fall short, though, as compared to other loan types is with respect to mortgage insurance. FHA mortgage insurance can be cumbersome and costly.

If you're going to take an FHA-backed mortgage, you need to know how FHA mortgage insurance works.

With FHA, Everyone Pays Mortgage Insurance Twice

The FHA's role in Mortgage World is different from Fannie Mae and Freddie Mac. The FHA doesn't "buy mortgages" from banks like Fannie and Freddie do. Rather, it insures them.

It works like this : The FHA issues mortgage guidelines to which banks can underwrite a mortgage. These mortgages are commonly called "FHA mortgages".

If a bank underwrites an FHA mortgage and the loan goes into default, the FHA repays the bank's losses from its capital reserves. The FHA's capital reserves are funded by mortgage insurance premiums paid by the nation's FHA-insured homeowners.

FHA homeowners pay two types of mortgage insurance -- Upfront Mortgage Insurance Premiums and Annual Mortgage Insurance Premiums. These insurance types are sometimes abbreviated and known as UFMIP and MIP, respectively.

Since April 18, 2011, every FHA-insured homeowner has been required to pay both at least one form of FHA mortgage insurance.

How to Calculate Your FHA Mortgage Insurance

The FHA's mortgage insurance requirements are generally simple.

FHA Upfront Mortgage Insurance Premiums

The FHA's current upfront mortgage insurance premium (UFMIP) is 1.75 percent of your loan size. For example, if you want to apply for an FHA purchase mortgage and your loan size is $300,000, then your Upfront MIP will be equal to $5,250.

Upfront MIP is not paid as cash. It's automatically added to your loan balance by the FHA. Therefore, your final loan size in the example above will be $305,250.

Furthermore, upfront MIP is not used in your FHA loan-to-value calculation. This means that you can make a 3.5% downpayment on your purchase, add the 1 percent UFMIP to your loan size, and still meet the FHA's low downpayment guidelines.

Upfront MIP is paid to the FHA upfront, at closing, and never paid again. Hence the name, "upfront" MIP. However, because UFMIP is added to your loan balance, you do pay mortgage interest on it for the life of your loan.

FHA Annual Mortgage Insurance Premiums

The FHA's other type of mortgage insurance is paid monthly. Called Annual Mortgage Insurance Premiums (MIP), it's paid as a part of your mortgage statement.

Annual MIP is required on all FHA mortgages and premiums vary according to your FHA loan's individual characteristics. The FHA's MIP table is below :

  • 15-year loan terms with loan-to-value over 90% : 0.60 percent annual MIP
  • 15-year loan terms with loan-t0-value under 90% : 0.35 percent annual MIP
  • 30-year loan terms with loan-to-value over 95% : 1.25 percent annual MIP
  • 30-year loan terms with loan-to-value under 95% : 1.20 percent annual MIP

As a real-life example, a 30-year fixed rate FHA mortgage in a high-cost area such as Loudoun County, Virginia; or Bethesda, Maryland may be for as much as $729,750. If the FHA mortgage is a purchase and the buyer is putting the minimum 3.5% down on the home, the annual MIP is 1.15 percent, or $699 per month.

15-year FHA mortgages with a loan-to-value of 78% or less are exempt from annual MIP payments.

How to Get Rid Of Your FHA Mortgage Insurance

One nice thing about FHA mortgage insurance is that it's not permanent. FHA mortgage insurance eventually goes away.

The schedule for getting rid of FHA mortgage insurance changes by loan term.

  • 30-year loan term : Annual MIP is automatically canceled once the loan reaches 78% loan-to-value and monthly MIP has been paid for at least 60 months.
  • 15-year loan term : Annual MIP is automatically canceled once the loan reaches 78% loan-to-value. There is no requirement thatmonthly MIP be paid for at least 60 months.

In other words, if you have a 30-year fixed rate FHA mortgage, you must pay mortgage insurance for at least 5 years before it can go away -- regardless of your loan balance. By comparison, if you have a 15-year fixed-rate FHA mortgage, your mortgage insurance is removed as soon as your LTV is low enough.

No action is needed on your part -- the FHA handles MIP removal automatically.

Also, note that the FHA does not allow a new appraisal to determine whether your loan is at 78% loan-to-value. The 78% LTV is based on the lesser of your purchase price, or its original appraised value.

At today's mortgage rates, a 15-year FHA mortgage on which the minimum 3.5% downpayment was made should pay down to 78% of the original purchase price within 26 months. A 30-year fixed will take 9 years to reach the same point.

Compare FHA Mortgage Rates And MIP

FHA mortgage rates are cheap right now; cheaper than conventional loans and cheaper than VA. There are great bargains for first-time buyers and other households planning on minimum downpayments.

The trick is understanding FHA mortgage insurance. FHA mortgage insurance can be costly in the long run and there's good cause for comparing options.

Before you lock a 30-year fixed FHA loan, do your due diligence -- look at 15-year payments, too. 15-year FHA mortgage rates are often lower than comparable 30-year FHA mortgage rates and the mortgage insurance terms are more favorable.

You'll pay less MIP each month, and can be rid of it as much as 7 years sooner.

 

Comments (1)

Eric Peltier
Eric Peltier - Premier Mortgage Group - Boulder Colorado - Boulder, CO
Mortgage Lender in Boulder CO

Very clear and concise, nice job!  All FHA borrowers should read this!

May 11, 2012 01:01 AM