Mortgage Insurance: What Is It? When Do I Have To Have It? When Can I Stop Paying Mortgage Insurance?
What Is It? FHA Mortgage Insurance Premium (MIP) is a financial
guaranty for FHA loans that helps reduce loss in the case of a default by the borrower.
FHA acts as the insurer for a lender that services FHA loans.
(PMI is “private mortgage insurance” and only charged on Conventional loans.
Learn more about Conventional PMI by clicking here.)
When Do I Have To Have It? Upfront Mortgage Insurance Premium (UFMIP) of 1.00% of the loan amount is required on every FHA single family residential loan.
As of April 18, 2011, monthly mortgage insurance will be required on all FHA loans as well, an increase of .25% over the previous levels.
For loan terms over 15 years:
- Annual premiums on loan amounts with 5% down or greater will be 1.10%.
- Annual premiums on loan amounts with less than 5% down will be 1.15%.
For loan terms 15 years or less:
Why Do I Have To Have It?
- Annual premiums on loan amounts with 10% down or greater will be .25%.
- Annual premiums on loan amounts with less than 10% down will be .50%.
It’s all about risk
A mortgage servicer does not want to have more than an 80% interest in a property because
they have to plan for worst case scenario – foreclosure. The legal costs related to foreclosure
combined with the loss that will be incurred trying to sell the property at auction for less
than market value have established the 80% safety mark for most all banks in the U.S.
And since most people do not have 20% down to buy their first homes, FHA created a loan
program that allows these borrowers to pay upfront and monthly insurance to insure the lender
for the shortage between their down payment and the 20% needed. Without FHA, many lenders
would not be willing to accept the risk of lending to a borrower that did not have at least
20% equity or down payment. This would make it significantly more difficult for customers
to purchase a home, or use their home equity to consolidate debt, or make home improvements.
So while mortgage insurance may be spoken of with disdain by most borrowers, it is often the
factor that has allowed many of us to gain approval for our loan.
(A bill was passed
in 2007 that allows tax deductibility of mortgage insurance, just like we have for the mortgage
interest that we pay. There are income restrictions on this provision, so check with a tax
professional to see if this would benefit you.)
When Can I Stop Paying FHA Mortgage Insurance?
There are 2 ways to drop your FHA
mortgage insurance on your home:
- Refinance to another mortgage without mortgage insurance
- Automatic termination of mortgage insurance once you have at least 78% equity in the home
The surest way to get rid of your mortgage insurance is to refinance to another loan that does not
have mortgage insurance. That may not be the most economical method, but is the surest.
Often borrowers have a Conventional loan that has monthly mortgage insurance that can be
eliminated if they refinance to an FHA loan for 15 years.
The second way to drop mortgage insurance is by automatic termination of mortgage insurance.
Once you have at least 78% equity in the home, lenders are required to cancel the mortgage
insurance, per the Homeowner Protection Act of 1998. But how is this calculated? For automatic
termination of the mortgage insurance, the current amount owed is compared to the original
value of the property, and when that ratio is 78% or less, the lender must remove mortgage
insurance. Unfortunately, this does not take into account any of the property’s appreciation
throughout the years, and you may save more money by refinancing long before this threshold is
reached. If you have an FHA loan and the original term was more than 15 years, you must pay
monthly mortgage insurance for at least 5 years before automatic termination will kick in.
(There is no borrower requested option to remove FHA mortgage insurance)
If you currently have an FHA loan and pay mortgage insurance, it would be wise to contact
one of our Loan Specialists at Churchill Mortgage to see if you could save money by refinancing.
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