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How To Ditch FHA’s Mortgage Insurance Premium

By on September 12, 2014 in Uncategorized

Mortgage Rates are lower, but Mortgage Insurance Premiums (MIP) for FHA-backed mortgages are continuing to rise. Despite this increasing trend of FHA, there is a way that borrowers can actually reduce or ditch their MIP completely.

Even though FHA requires only require a minimum downpayment of 3.5%, FHA’s expensive Mortgage Insurance Premiums are costing them potential borrowers. Homeowners are starting to reconsider their mortgage options because of this issue. Some are even turning to refinance in order to reduce their rate just to be able to keep up with FHA’s rising premium costs. Others are ditching the program completely.

Understanding FHA Mortgage Insurance Premiums

Unlike Fannie Mae and Freddie Mac, The FHA does not buy mortgages from banks. The Federal Housing Administration’s role in the housing market is to insure mortgages. Before a mortgage can be insured under FHA, they must meet all FHA mortgage guidelines. By insuring these loans, banks are protected from losses in case of the possibility of a default on the loan.

Current FHA homeowners are starting to realize that FHA’s MIP isn’t necessarily a permanent requirement and are now taking the initiative and refinancing away their MIP in as little as 30 days.

The FHA is a self-funded United States Government Agency and is a part of the National Housing Act of 1934. Banking systems failed during the Great Depression and the nation saw a drastic decrease in homeownership and purchase loans. The government saw an opportunity to help its american citizens relive the dream of homeownership by establishing the FHA in 1934 and came 1965, the agency became a part of The Department of Housing and Urban Development (HUD).

The FHA mortgage itself is a wonderful program, but it is now costing millions of homeowners more than they bargain for because of its Mortgage Insurance Premiums and Upfront Mortgage Insurance Premiums that it requires from borrowers today which are not getting any cheaper.

Requiring its borrowers to pay for both types of mortgage insurance premiums is getting to be too much for many homeowners, especially when the MIP in most cases usually lasts throughout the life of the loan.

Since the mortgage does belong to the borrower, they can actually remove the MIP through a successful refinance.

FHA’s Mortgage Insurance Premiums have been in the rise for the past 3 years and is not showing any signs of dropping anytime soon. These mortgage insurance premiums do vary depending on the loan amount.

Mortgage Insurance Premiums: 12 Installments Per Year

As if making your monthly mortgage payments isn’t enough, FHA mortgage insurance premium is included in your mortgage and must be paid in 12 installments each year. You may notice within your statement a mentioning of HUD Escrow, Risk-Based HUD, or Monthly Mortgage Insurance which is referring to your monthly FHA mortgage insurance payment.

Also, any loan amount between $625,000 and $729,750 may be subject to an additional 0.25% point in your premium costs. This type of large loan amount falls under the FHA Jumbo Mortgage.

Qualifying For A MIP Removal

A common misconception of FHA’s Mortgage Insurance Premiums is that it is permanent and there is no way you can remove it. Luckily this is false information and that you can actually do just that through a refinance.

Borrowers who have an FHA-backed mortgage prior to June 3, 2013 may be eligible for an MIP removal, so long as these requirements are met.

If you have a 15 – year loan term, your MIP can be eliminated as soon as your loan has accrued at least 78% LTV. You would be free of MIP payments for up to 60 months. Borrowers with a 30 – year loan term must meet the same requirements, except that they must meet their 60 months of paid MIP to be able to remove it. Keeping in mind that the LTV of the home is based off of the previous appraisal and not the day that it was purchased. It is quicker for a 15 – year loan term to reach its 78% mark, because rates for a 15 – year loan term are usually higher than a 30-year loan term.

Many homeowners now have higher home equity than their LTV in comparison to the time of purchase due to an increase in home values that have been rising for the past 3 years, making them eligible for an MIP removal or reduction.

Borrowers with at least 5% equity may be able to find a lower rate with a Conventional Mortgage as opposed to FHA. With Fannie Mae and Freddie Mac, a borrower’s mortgage insurance usually gets cancelled out by the time they reach 20% equity. So if a borrower with more than 5% of equity in their home, they would see an even bigger result.

FHA borrowers may be better off refinancing into a Conventional mortgage in order to get some type of financial relief. Mortgage rates may be lower with an FHA mortgage, but considering the MIP that comes with the mortgage it definitely defeats the purpose of a low rate quote.

About the Author

About the Author: Jessica Lucas is the managing editor for Mortgage Home Base, a top real estate finance blog dedicated to helping borrowers and home buyers understand the home loan process. Follow Jessica on Google +, and share your comments here. .
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