FHA mortgage insurance, known as MIP, is an insurance policy that protects the lender if the loan holder defaults on the mortgage. The MIP policy allows the lender to issue FHA backed loans that require a smaller down payment. FHA MIP lowers the risk for the lender, and the benefits are given to the borrower.
The home-buyer pays for MIP both up front and every month. Borrowers with loans that were issued after June 1, 2013 must pay mortgage insurance for the entire life of the loan, with a few exceptions. If you put down 10% or more on the loan, you can cancel the MIP after 11 years. If your loan was closed before June 1, 2013, you can cancel the MIP once you have 20% equity in the home.
Are You Looking to Get Rid of Paying Mortgage Insurance on Your FHA Loan?
Another option to get out of paying mortgage insurance if you have a loan issued after June 1, 2013 is to simply refinance the loan into a conventional mortgage when you have reached 20% or more equity in the home. Note that getting approved for a conventional loan requires a higher credit score than with an FHA loan. So, make sure your credit is in good shape if you want to refinance into a conventional loan. There is no prepayment penalty on an FHA loan program, so you can refinance at any time.
Refinancing into a conventional loan could occur sooner than you think; property values have gone up markedly in the past three years. You may want to check property values in your area and even pay for an appraisal to see how much your home could sell for. There are some parts of the country that are seeing yearly property value increases of 10% or more. According to the National Association of Realtors, the median home listed for sale in Q2 of 2017 was $255,000. This was more than 6% above a year earlier. This is happening across the country.
But one issue you could run into is the interest rates for a refinance into a conventional loan could be higher than what you are paying now. Rates in 2018 are on the rise, with conventional rates in the 4.5% and 4.6% range. This is nearly a point higher than a year ago. If your rate is at 4% or lower, you might need to wait to refinance to get rid of your mortgage insurance payment.
Cancelling Mortgage Insurance with a Conventional Mortgage
You have more options to get rid of PMI with a conventional mortgage. PMI is the name of mortgage insurance for conventional loans. Once you reach 20% equity in the home with a conventional mortgage, your PMI should be dropped off the loan. You should write a letter to your lender to request the insurance policy be cancelled. Not every lender will automatically cancel the mortgage insurance, you may need to contact them in writing. But federal law states the conventional lender must drop your PMI once you have 22% equity. Still, it is the smart home owner who keeps on top of this matter; it is not unusual for a lender to continue to accept PMI payments beyond the point which you are required to pay them.
But keep in mind that most lenders will base the 22% equity/78% LTV on the last appraised value. If your property has shot up in value, you should contact your loan servicer to determine what the requirements are to get an early cancellation. The loan servicer usually will require a new appraisal. This will cost you approximately $400, so you should check home values in your area to see if your home will really appraise enough to cancel PMI early. You can check with your realtor who should be happy to run comps for you for your neighborhood. This is one of the main reasons that LPMI loans are in high demand in 2018.
The bottom line is that mortgage insurance is often a necessary evil for many home buyers. If you do not have the cash to make a 20% down payment, you will need to get mortgage insurance, unless you get a VA loan.
Many home buyers with previous credit problems may need to get FHA financing because these loans are easier to get with lower credit scores. Even though you could get locked into paying MIP longer than you like, sometimes for the life of the loan, this may be the best option for people with lower credit scores. But once you have 20% equity and you have good enough credit to refinance, you should get into a conventional mortgage if the rates are low enough to make the move make sense.