Canceling Your FHA Mortgage Insurance Premium
3.5% downpayment, refinances without appraisal, and very low mortgage rates are few of the many reasons why mortgage loans backed by the FHA (Federal Housing Administration) are a hit to homeowners refinancing and homebuyers. There’s only one thing it comes shorthanded – the mortgage insurance. FHA mortgage insurance premiums (MIP) are difficult to handle and costly unlike conventional mortgages, USDA loans and VA loans. Millions of U.S. homeowners are paying FHA MIP monthly; and if you are one of these, and you are aware that you are paying too much so it’s time to focus on your options. Within the a month, your FHA MIP obligation can be finished.
FHA MIP: How It Works
Unlike Fannie May and Freddie Mac, FHA does not purchase mortgages from banks because FHA is the insurer of mortgages. Here’s how it works: Banks choose a mortgage to cover based on the official mortgage guidelines presented by FHA, and mortgages which successfully meet the qualifications get insured. FHA mortgages are loans which the agency insures. Therefore, if your loan goes into a default, the bank will receive the payment for the loss from FHA; FHA is much like a backstop for banks. The fund used for the payment comes from the Mutual Mortgage Insurance (MMI) fund which is comprised by two types of mortgage insurance premiums. These two types of MIP are the FHA Upfront Mortgage Insurance Premium (UFMIP) and the FHA annual Mortgage Insurance Premium (MIP); and these are paid by all FHA-backed homeowners for up to 30 years.
So what should you do to relieve yourself from FHA MIP? Your mortgage belongs to you, so get a refinance since home values have increased from 2011.
FHA MIP: How Much?
The mortgage insurance premiums differ depending on the loan type and length; and take note that there are two types of mortgage insurance.
FHA Upfront Mortgage Insurance Premiums
This is 1.75% of your loan size. Take for example, a loan size of $400,000 from an FHA-insured mortgage will give you $7,000. FHA adds your Upfront MIP to your total loan balance which means than with a $400,000 loan size, your actual borrowed amount will be $407,000.
You can have 3.5% downpayment when you buy, your borrowed amount plus the UFMIP, and still be able to acquire the FHA’s minimum downpayment guidelines since UFMIP does not affect the loan’s LTV or loan-to-loan calculation. At the closing, the 1.75% UFMIP is collected and received by the Mutual Mortgage Insurance Fund; and you’ll never have to pay it again.
This is where it gets interesting. Within the first 36 months of closing, refinancing your FHA mortgage will present you a UFMIP refund on your unused MIP portion. This refund is based on your original UFMIP payment and continually decreases by 2 percentage points yearly until there is nothing left to be refunded.
FHA Annual Mortgage Insurance Premiums
This is collected in 12 installments annually; it is a part of your monthly mortgage payment. The FHA MIP is often written as “HUD Escrow”, “Risk-Based HUD”, or “Monthly Mortgage Insurance” on your monthly mortgage statement. The size of your mortgage insurance premium depends on your loan’s particular characteristics, and when your loan started; and all FHA mortgages require this.
The yearly MIP for a loan from 2011 varies from the MIP for a loan from 2014. The annual MIP requirement has changed multiple times since 2008. Assuming a 30-year fixed rate FHA mortgage with 3.5% downpayment, the FHA annual mortgage insurance premium since 2008 has been as follows:
• Prior to January 2008 : 0.50% annual MIP
• October 2008 : 0.55% annual MIP
• April 2010 : 0.55% annual MIP
• October 2010 : 0.90% annual MIP
• April 2011 : 1.15% annual MIP
• April 2012 : 1.25% annual MIP
• April 2013 : 1.35% annual MIP
• January 2015 : 0.85% annual MIP
Jumbo FHA loans should expect an additional 0.25 percent point premium; these loans are those that are more than $625,500, but less than $729, 750. In late 2013, maximum FHA loan size for 1-unit homes was decreased to $625,000. Be reminded that first-time buyers using the FHA HAWK program can avail MIP discounts of up to 25 basis points off annual MIP, and 50 basis points off UFMIP. That is if the rumored program is made available to the public.
FHA MIP Exception: Do You Qualify?
Few years ago, the FHA passed a rule where longstanding FHA homeowners are exempted from FHA MIP increases. Thus, for this group of FHA homeowners, MIP is bound to stay low regardless of the multiple changes in FHA purchase loans and FHA-insured refinances. For example, had your current FHA loan been endorsed on or before May 31, 2009, refinance will be cheap. Upfront MIPs drop from 1.75 percent to just 0.01% or $10 over $100,000 borrowed, a privilege for longstanding borrowers. Notwithstanding the LTV, grandfather loan premiums are the same over all 15-year and 30-year mortgages.
FHA Mortgage Insurance: Canceling
Some are suggested to pay MIP for the next 30 years and that could be you since not every FHA-backed homeowners meet the requirements for grandfather mortgage insurance premiums. Even at 78% LTV, not all homeowners can have their MIP automatically cancelled. Good thing that FHA mortgage insurance always changes; and you are never denied the right to refinance it out.
For homeowners whose FHA mortgage predates from June 3, 2013. Their FHA MIP will automatically cancel when these conditions are met:
– 30-year loan term: Yearly MIP becomes ineffective once the loan attains 78% loan-to-value and annual MIP has been paid off for at least 60 months.
– 15-year loan term: Yearly MIP becomes ineffective once the loan attains 78% loan-to-value. Paying off the annual MIP for at least 60 months is not required.
The loan-to-value calculations are based not on the current appraisal value of the home, but on FHA’s last known value of the home. The “last known value” is the value of the home the last time it was FHA-appraised.
For homeowners who have a mortgage predating from June 2013, they can just wait it out since a 15-year FHA mortgage with 3.5 percent down would reach 78% LTV in just about two years. On the other hand, a typical 30-year FHA mortgage with the same downpayment will reach 78%LTV in about 11 years.
Many FHA homeowners have switched from FHA loan to a Fannie Mae or Freddie Mac loan. They are refinancing away from FHA. Take the Conventional 97, with its re-release all you need is 3% equity now. Conventional loan can be much cheaper than FHA loan because of these reasons:
1. Mortgage insurance rates are lower through Fannie Mae and Freddie Mac.
2. Once your home has 20% equity, conventional MIP payments cancel.
Because conventional loan’s MIP drops as home’s LTV drops, homeowners with at least 5% equity receives a more stark improvement. MIP is the same for everyone with an FHA loan. The best refinance choice may be to leave FHA, for homeowner’s with FHA loans. U.S. home values are up as much as 15% since 2013; and conventional mortgage rates are the cheapest they have been over the same time period.
FHA MIP: Cancel It Now
If you have a mortgage loan which predates June 1, 2009, you can look at a refinance by using the FHA Streamline Refinance to “grandfather in”. MIP can be costly despite the low mortgage rates. No cost and no obligation – complimentary conventional mortgage rate quotes are available online where social security number is not required to proceed.