How to Get Rid of PMI on an FHA Loan

FHA Mortgage Insurance Premium (MIP) and Private Mortgage Insurance (PMI) both protect lenders against borrower default, but apply to different loan types with distinct removal rules. FHA loans, insured by the Federal Housing Administration, require MIP regardless of the down payment. This enables homeownership for borrowers who might not qualify for conventional loans due to lower credit scores or smaller down payments, by ensuring lenders are compensated if a borrower defaults.

Understanding FHA Mortgage Insurance Premium (MIP)

FHA loans involve two types of mortgage insurance premiums: an Upfront Mortgage Insurance Premium (UFMIP) and an annual MIP. The UFMIP is a one-time fee, typically 1.75% of the loan amount, usually paid at closing or financed into the loan balance. Financing it into the loan means you pay interest on this amount, increasing the total cost.

The annual MIP is paid monthly as part of your mortgage payment. Its cost varies based on the loan amount, loan-to-value (LTV) ratio at origination, and loan term. Rates can range from 0.15% to 0.75% of the loan amount. This annual premium helps sustain the Mutual Mortgage Insurance Fund, which the FHA uses to cover claims from lenders in case of borrower default.

Determining Your Eligibility for MIP Removal

Eligibility for FHA MIP removal depends on the loan’s origination date and original loan-to-value (LTV) ratio. For FHA loans originated between January 2001 and June 3, 2013, the annual MIP can be removed once the loan balance reaches 78% of the original purchase price or appraised value, provided borrowers maintain a good payment history. If MIP payments continue after reaching this LTV threshold, contact your loan servicer.

For FHA loans originated on or after June 3, 2013, MIP removal rules are more restrictive. If the original LTV was 90% or less (10% or more down payment), the annual MIP can be removed after 11 years with on-time payments. However, for loans with an original LTV greater than 90% (less than 10% down payment), the annual MIP is required for the entire life of the loan, unless refinanced.

Strategies for Removing FHA MIP

One strategy for removing FHA MIP, particularly for loans originated before June 3, 2013, involves reaching the 78% loan-to-value (LTV) threshold. For these loans, once the balance falls to 78% of the original home value, the annual MIP should automatically terminate with consistent on-time payments. Monitor statements and contact your servicer if MIP payments continue. Making additional principal payments can accelerate reaching this LTV, shortening the time you pay MIP.

For most FHA loans originated after June 3, 2013, and for older loans not meeting automatic termination, refinancing to a conventional loan is the primary method for eliminating FHA MIP. This involves applying for a new mortgage with a conventional lender, including a credit check, income verification, and a home appraisal. If the new conventional loan’s LTV is 80% or less, private mortgage insurance (PMI) is usually not required. Even if PMI is initially required, conventional PMI can be requested for cancellation at 80% LTV and automatically terminates at 78% LTV, differing from FHA MIP rules.

Refinancing can offer benefits like a lower interest rate or tapping into home equity, but incurs closing costs, typically 2% to 5% of the loan amount. Evaluate if MIP savings outweigh refinancing costs. Accelerated principal payments on an FHA loan can also build equity faster, making it a better candidate for refinancing to a conventional loan without mortgage insurance.