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.
How to cancel FHA Mortgage Insurance? – If you Bought Your Home Prior to June 2013!
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! Check out the savings on this program below compared to FHA financing.
Purchase with a 5% down Conventional loan with NO Monthly MI
Here is an example of a Conventional 5% down NO MI purchase option compared to a FHA 3.5% down purchase option. In this scenario the buyer is looking to purchase a $375k home. On the left column is the conventional 5% down No MI option, the buyers monthly PITI payment is $2,105.
On the right hand side is the FHA 3.5% down payment option. The FHA monthly PITI payment (including FHA MIP) is $2,426. The conventional 5% down loan saves the buyer $321 a month and $32,117 over the next 10 years vs the FHA purchase option. *Fyi a buyer can borrow up to $417k on the 5% down No MI program.
Conventional NO monthly MI available on jumbos now too
Did you know that Conventional financing with the NO monthly MI option is also available on jumbo loans now too? For example, jumbo buyers in San Diego now only have to put down 10% and can finance up to the Conventional jumbo loan limit of $546k, ($625k in Orange County and LA) to eliminate the monthly MI.
Compare this to FHA jumbo financing where expensive MI must be paid each month. On a similar loan using FHA financing, a buyers payment will be an extra $400 a month to cover the expensive FHA MIP. See HERE for information on how to qualify for the Conventional No MI loan program, so you know how it works and who can qualify.
Helping buyers choose the right loan program
FHA financing is a great program for new buyers, and especially when an FHA loan is their only option. But it is very important that buyers today understand how long they may be paying the FHA MI for, as paying FHA MI for up to 10 years can get very expensive! Unfortunately I believe too many buyers today are being put into FHA loans because they did not know other better loan options were available to them.
Overall if a buyer can qualify for both FHA and Conventional, I believe the conventional 5% down No monthly MI program is a better loan option for buyers than FHA, as this loan program will also help buyers obtain home ownership with a low down payment, and they also do not have to pay expensive mortgage insurance every month. So now buyers can maximize their savings both short term and long term by putting the additional monthly savings towards other investments.
If you have any questions about how to eliminate FHA mortgage insurance, or how to qualify for the conventional 5% down NO MI program, please feel free to contact me directly at 858-200-9602. I look forward to chatting soon.