We’ve got good news and bad news when it comes to getting rid of MIP (mortgage insurance premiums) on an FHA loan. So, let’s get the latter out of the way first: Financing your home with an FHA loan means paying mortgage insurance premiums for at least 11 years. But, rest assured, there are still plenty of benefits.
Now here’s the good news: As you build up your home equity, there are steps you can take to get rid of MIP. Let’s explore them!
Acronym Alert: As much as we try to avoid complicating mortgages with acronyms, we also don’t want to make you read “Federal Housing Administration” every other sentence. So, here are a few key acronyms you’ll see repeated throughout this blog and what they stand for.
- FHA: Federal Housing Administration
- MIP: Mortgage insurance premiums
- PMI: Private mortgage insurance
Oh, and one more important definition: Mortgage insurance (private or otherwise) protects the lender if you default on your loan. Now, back to the good news.
What is MIP?
Government-backed FHA loans can be a smart choice for any borrower who needs flexible down payment and credit score requirements. Often considered a great option for first-time home buyers, FHA loans offer perks like:
- Down payments as low as 3.5%
- Credit scores as low as 550
- Down payment assistance programs allowed
But, that flexibility comes with a tradeoff. You’re required to pay MIP on an FHA loan, regardless of how much home equity you have. MIP includes a fee you’ll pay at closing, plus annual premiums that are part of your monthly mortgage bill. In total, your annual MIP costs will depend on your loan amount, your down payment size, and the length of your mortgage term.
What’s the difference between MIP and PMI?
For some mortgages, like VA and USDA loans, qualified borrowers aren’t required to pay any kind of mortgage insurance. But for the two most popular mortgage options—FHA and Conventional—it’s a different story. For these loan types, you’ll likely have to pay either MIP or PMI.
Both MIP and PMI are forms of mortgage insurance, but the FHA provides MIP. Since Conventional loans are not insured or guaranteed by any government agency, PMI is provided by private insurance companies.
If you put down less than 20% on a Conventional loan, you’ll pay PMI as a monthly premium. But, you’re eligible to drop PMI once you’ve built up 20% equity (in other words, when you own 20% of your home). And when you hit 22% equity, your PMI is automatically dropped for you.
How can I get rid of MIP payments on my FHA loan?
The ability to drop MIP depends on a few factors.
1. When did you get your FHA loan?
If you took out your FHA loan before June 2013, you may be able to cancel MIP. To be eligible, you need to have 22% equity in your home and have made your payments on time. If you purchased or refinanced with an FHA loan on or after June 3, 2013, MIP will last for the life of the loan.
2. How much did you put down?
Unlike private lenders, the FHA doesn’t cancel your MIP once you reach a certain home equity percentage. The amount of time you’ll have to pay MIP mainly depends on your down payment. If you put down 10% or more at closing, you’ll pay MIP for 11 years before you can cancel. If you put down less than 10%, you’re not eligible to drop MIP at any point.
3. Do you plan to refinance your FHA mortgage?
Many homeowners like to refinance to take advantage of a lower interest rate or get cash out. But even if rates aren’t ideal, a refi could still help you drop MIP. By switching from an FHA loan to another loan, such as a Conventional mortgage, you could also be eligible to cancel your mortgage insurance payments.
So, can I actually get rid of MIP on an FHA loan?
If you’re getting an FHA loan, you can’t avoid MIP. Regardless of how much equity you build, you’ll be required to pay an upfront mortgage insurance premium at closing as well as annual premiums.
MIP doesn’t have to be forever, though. If you put down at least 10% on your FHA loan, you’ll only need to pay MIP for 11 years. If you can’t swing that down payment now, one of the most common workarounds for this is to refinance to a Conventional loan once you’ve built up 20% equity. At that point, you can drop the PMI that would replace FHA mortgage insurance when you refinance.
Mortgage insurance premiums are an unavoidable part of financing your home with an FHA loan. Refinancing to a Conventional loan could be your best bet to drop it.
Bottom line, as long as you have your FHA loan, you’ll likely have to pay MIP. But, refinancing to a different loan type when you’re ready to drop it may be easier than you think (especially when you work with Cardinal Financial). You’ve got this.