How to Remove Mortgage Insurance on an FHA Loan

What Is FHA Mortgage Insurance?

Mortgage insurance is a financial product that protects the lender in the event that you stop making payments on your loan. This risk mitigation tool allows FHA lenders to offer lower down payments and more affordable mortgages.

When you close on an FHA loan, you're required to pay an upfront mortgage insurance premium of 1.75% of the loan amount. You'll also need to pay an annual mortgage insurance premium (MIP), which can range from 0.15% to 0.75% of the loan amount, depending on your loan type, base loan amount, down payment and repayment term.

Tip: FHA mortgage insurance is different from private mortgage insurance (PMI), which is paid on conventional loans not backed by the U.S. government. You're required to pay mortgage insurance on FHA loans, but you'll only pay PMI if you put less than 20% down on your home.

How to Remove Mortgage Insurance on an FHA Loan

Your options for removing mortgage insurance will ultimately depend on when you first took out your loan and how much money you put down at closing. Here are some steps you can take to evaluate your situation and choices.

1. Check Your Eligibility

Before you get started, you must first determine your eligibility based on your loan origination date:

• July 1991 - December 2000: You cannot cancel your FHA mortgage insurance premium.
• January 2001 - June 3, 2013: Your MIP will automatically be canceled once you reach a loan-to-value (LTV) ratio of 78%, provided you're in good standing with payments.
• After June 3, 2013: Your MIP will be canceled after 11 years if you made a down payment of at least 10%. Otherwise, it'll remain attached to your loan for the duration of its term.

2. Review Your Options

Depending on your eligibility for removal, here are some potential options you can consider to drop MIP from your FHA loan:

• Wait for automatic removal. If you qualify for removal at an LTV of 78% or after 11 years, you may simply wait until you reach that trigger event.
• Make extra payments. For LTV-based removal, you can make extra payments to reach 78% more quickly.
• Refinance to a conventional loan. If you don't qualify to remove your MIP or you don't want to wait, you may consider refinancing your mortgage with a conventional loan. Just keep in mind that you'll need to pay closing costs on the new loan. Also, if your LTV is over 80%, you may need to pay private mortgage insurance (PMI), which could be costlier than the MIP on your FHA loan.

Learn more: What Type of Mortgage Is Best?

What Happens After Removing Mortgage Insurance?

After removing MIP from your FHA loan, your monthly mortgage payment will decrease by the amount of the premium. Depending on your situation, that translates to savings between 0.15% and 0.75% of your mortgage balance each year.

If you choose to refinance your loan with a conventional lender, however, the impact may vary based on a few factors:

• Your new loan rate: If your new loan has a lower interest rate, you may enjoy additional savings. Keep in mind that it generally doesn't make sense to refinance into a loan with a higher interest rate, even to remove MIP.
• Your new loan term: If you've been paying your loan for several years, refinancing the current balance with a new 30-year term may reduce your monthly payment by stretching out your repayment over a longer period.
• Your LTV: If you still have an LTV over 80%, you may be forced to pay PMI, which may offset any savings you get from a lower rate or extended repayment term.

Should You Remove Mortgage Insurance From an FHA Loan?

While removing MIP from your FHA loan can result in savings, it's important to consider what it might take to accomplish your goal. Here are some factors to keep in mind:

• Eligibility: Understanding your options can help you zero in on potential solutions to determine how feasible it is to remove MIP.
• MIP amount: If your MIP percentage is on the lower end, it may not be worth the cost of refinancing or accelerated payments to get it removed.
• How long you plan to stay in the home: If you're not planning on living in your home for a long time, you may not break even with your savings. For example, if refinancing costs $10,000 and saves you $200 a month, it'll take 50 months to break even.
• LTV: If you can get MIP removed once your LTV is 78%, run the numbers to find out when you'll reach that threshold. If you're still over 80%, paying PMI on a conventional refinance loan may increase your costs rather than reduce them.

In other words, it's crucial to understand both potential savings and costs to determine whether taking steps to remove MIP is right for you.

Frequently Asked Questions

The Bottom Line

Getting rid of MIP on your FHA loan can help you save some money. However, it's important to compare those savings to the potential costs you may incur to accomplish your goal.

If you're thinking about refinancing your loan with a conventional lender, it's a good idea to review your Experian credit report and FICO^® Score^☉ for free to get a sense of your eligibility for better loan terms.