How To Drop FHA Mortgage Insurance

Mortgage insurance is a policy designed to protect a mortgage lender's investment. If you default on a home loan that has mortgage insurance, the lender can use that coverage to recoup some of their financial losses. Most loans typically require mortgage insurance when you put down less than 20% as a down payment.

Federal Housing Authority loans, or FHA loans, have mortgage insurance premium (MIP) requirements, but they have different terms for dropping it compared to conventional loans. When you get an FHA loan, your lender may require you to pay these mortgage insurance premiums permanently.

It's important to understand how FHA mortgage insurance works, when you can (or can't) get rid of it, and more about your options for reducing your mortgage costs.

When Can You Drop Mortgage Insurance on an FHA Loan?

If you have an FHA loan that was issued on or after June 3, 2013, you can only drop mortgage insurance once the mortgage is paid in full. The Department of Housing and Urban Development (HUD) requires two types of mortgage insurance premiums for FHA loans:

• Upfront MIPs: paid at the time you close on the loan
• Annual MIPs: paid in monthly installments as part of your mortgage payment

The upfront MIP rate is 1.75% of the base loan amount and is due within 10 calendar days of mortgage closing. Annual MIP rates are based on the loan amount, loan-to-value (LTV) ratio, and mortgage term. A loan-to-value ratio measures the amount owed on the mortgage against the home's value.

Previous FHA Mortgage Insurance Rules

If you took out an FHA loan before that June 13, 2012 and after Dec. 31, 2000, HUD allows you to drop mortgage insurance once the unpaid principal balance is 78% or less.

In other words, you would have needed 22% equity in the home to get rid of mortgage insurance. Equity is the difference between what you owe on your home and what it's worth.

How Refinancing FHA Loans Can Remove Mortgage Insurance

One option to remove mortgage insurance is to refinance an FHA loan into a new loan. When you refinance a mortgage, you take out a new loan to replace your existing one. You then make payments to the new loan going forward.

You may consider refinancing if you can get a new loan for a competitive interest rate and without mortgage insurance requirements. Generally, you can avoid mortgage insurance when your LTV is 80% or less.

Conventional Mortgage PMI vs. FHA Loan Insurance

Conventional mortgage private mortgage insurance (PMI) and FHA mortgage insurance follow different rules for removal.

Conventional loans allow you to ask for PMI removal once you reach 20% equity. When you have a loan-to-value ratio of 78%, removal should be automatic. If your loan-to-value ratio is less than 78% equity but your lender has not removed PMI, you can contact them to ask that it be dropped.

A less common scenario involves reaching the halfway point on your mortgage amortization schedule. If you have a 30-year mortgage, for instance, then you'd hit the halfway mark after 15 years. At this point, your lender is required to remove PMI as long as you're current on payments. This is more common for borrowers who have an interest-only period on their loan, principal forbearance, or a balloon payment.

With an FHA loan, you won’t have the option to get out of mortgage insurance if you got the loan after June 3, 2013. For that reason, you might consider refinancing to remove mortgage insurance premiums if you can get a loan with a similar interest rate. Refinancing is also an opportunity to choose a new loan term and potentially get a better rate.

Tips for Reducing Mortgage Costs

Paying mortgage insurance on an FHA loan can increase your monthly payment and overall mortgage costs. If you're set to apply for a mortgage, there are a few steps you may be able to take to reduce the costs. For instance, you might work on improving your credit score to qualify for lower rates, increase the amount you're saving toward a down payment, or buy discount points.

If you already own a home with mortgage insurance and you're not yet in a position to remove it, you can still potentially generate some savings through various tax breaks. For instance, if you itemize your taxes, you may be able to deduct mortgage interest payments. Mortgage insurance is also tax-deductible, as are payments you make for property taxes or necessary home improvements.

Frequently Asked Questions (FAQs)