A question that all FHA buyers ask is “How and when can I cancel the FHA mortgage insurance from my monthly payment?” This information below is for FHA homeowners and buyers who bought their home prior to June 2013. Did you know that a FHA buyer who only puts down the minimum down payment of 3.5%, AND only makes their minimum monthly mortgage payment each month, will pay monthly Mortgage Insurance Premiums or “MIP” for up to 10 years? As many buyers today have to take FHA financing to purchase a home, it is very important that they know how and when they can eliminate the FHA MIP.
For example, the schedule for getting rid of FHA mortgage insurance changes by the loan term.
On a 30-year loan term: Monthly Monthly Insurance “MIP” is automatically canceled once the loan reaches 78% loan-to-value (LTV) AND has been paid for a minimum of 60 months. In other words, if you have a 30-year fixed rate FHA mortgage, you must pay MIP for at least 5 years before it can go away — regardless of your loan balance.
*If you take a 30 year FHA mortgage, and you only put down the minimum FHA down payment of 3.5%, you could potentially pay MIP for roughly 10 years to reach 78% loan to value IF you only make the minimum monthly mortgage payment due each month!
On a 15-year loan term : Monthly MIP is automatically canceled once the loan reaches 78% loan-to-value. There is NO requirement that MIP has to be paid for at least 60 months. By comparison, if you have a 15-year fixed-rate FHA mortgage, your MIP is removed as soon as your LTV is low enough. No action is needed on your part — the FHA handles MIP removal automatically.
*TIP. Did you know there is NO FHA monthly MIP on a 15 year term as long as the buyer finances less than or equal to 78% loan to value.
1. Can you use an appraisal to eliminate FHA MIP?
No, the FHA does NOT allow homeowners to use a new appraisal to determine whether your loan is at 78% LTV (loan-to-value). The 78% LTV is based on the lesser of your purchase price, or its original appraised value when you purchased the home.
2. Does the interest rate make a difference to the MIP?
Yes, the interest rate does make a difference to how long the MIP will stay on the loan. Here is an example of a purchase scenario below that has a sales price/appraised value of $250,000 on a loan with a 5% interest rate, and is based on the buyer making regular monthly payments (no additional principal prepayment). *If the interest rate is 1% lower than 5%, subtract one year. If the interest is 1% higher than 5%, add one year.
Down Payment/ Loan/Term/ Years MI to cancel
5%, $237,500, 30 yr = 10 yrs to eliminate MI
10%, $225,000, 30 yr = 8 yrs to eliminate MI
15%, $212,500, 30 yr = 5 yrs to eliminate MI
3. Does a bigger down payment reduce monthly MIP?
Yes a bigger down payment does reduce the monthly MIP payment a little. For example, if you put down 5% or more on a FHA purchase the monthly MIP factor is (1.20%) of the loan amount, whereas if you put down 3.5% the monthly MIP factor is 1.25%. *Please note that on jumbo loans over $625k, FHA MIP is increasing to 1.5% on June 11th 2012.
An alternative to FHA financing for buyers
FHA MIP is getting very expensive these days and there are lots of buyers who are stalling on committing to purchasing a home because of it! For example, on a $400k loan a new buyer will pay $5k a year, or $416 a month towards FHA MIP ($400k x .0125% = $416).Therefore it is important that buyers explore all their loan options if they only have a low down payment available for purchasing a home. Otherwise as mentioned above, they could be stuck paying FHA monthly MIP on a mortgage for 10 years!
A great alternative to FHA is the “Conventional 5% down NO monthly mortgage insurance loan option” instead!