The mortgage insurance premium can add almost $225 monthly to the payment on a $265,000 FHA mortgage. The decision to get an FHA loan may have been the lower down payment requirement or the lower credit score levels, but now that you have the loan, it is possible to eliminate it?
The mortgage insurance premium protects lenders in case of a borrower’s default and is required on FHA loans. The Up-Front MIP is currently 1.75% of the base loan amount and paid at the time of closing, or financed into the loan amount. The annual MIP (paid monthly) for loans with greater than 95% loan-to-value is .85% per year.
For loans with FHA case numbers assigned before June 3, 2013, once the loan is paid down to 78% of the original loan amount, the MIP can be cancelled. The borrower will need to contact the current servicer for the specific requirements.
However, for loans greater than 90% with FHA case numbers assigned on or after that date, the MIP is required for the term of the loan.
Most homeowners with FHA mortgages are not eligible to cancel the MIP because they either originated their loan after June 3, 2013, put less than 10% down payment and/or got a 30-year loan. If they have at least 20% equity in the home, they can refinance the home with an 80% conventional loan which in most cases, does not require mortgage insurance.
With normal amortization on a 30-year loan, it takes approximately 11-years to reduce the original loan to the 78-80% requirement based on normal amortization. There is another dynamic involved which is the appreciation on the home. As the home goes up in value and the unpaid balance goes down, the equity increases. Further, one extra principal and interest payment annually will reduce a 30 year mortgage to 22 years.
If you believe that you have enough equity that would eliminate the need for mortgage insurance, I can investigate refinancing with a conventional loan. Borrowers refinancing will incur expenses in starting a new mortgage and the interest rate may be higher than the existing rate. But, a lower MI payment or the elimination of the MI/MIP could significantly lower your monthly mortgage payments.