Refinance to end mortgage insurance premiums
FHA loans and mortgage insurance
- FHA loans can be less flexible about mortgage insurance premiums (MIPs).
- Refinancing an FHA loan can eliminate mortgage insurance.
- FHA loans can be refinanced through the FHA or a conventional loan program
- The FHA Streamline Refinance offers favorable upfront and monthly MIP rates.
If you have a home mortgage loan through the Federal Housing Administration (FHA), you’re likely familiar with mortgage insurance premiums (MIPs).
FHA mortgages can be more restrictive around these premiums than conventional loans, such as those serviced by government-sponsored enterprises Fannie Mae and Freddie Mac. Here’s a brief recap of the FHA’s MIP requirements:
- For loans applied for on or after June 3, 2013, homeowners are required to pay MIP for 11 years. You’ll pay the premium for the life of the loan, however, if your original loan-to-value (LTV) ratio was 90 percent or higher.
- For loans applied for between Jan. 1, 2001, and June 2, 2013, MIP is cancelled when the home’s LTV drops to 78 percent, the premium has been paid consistently for at least five years, and the borrower hasn’t made any delinquent mortgage payments during the previous 12 months.
- For loans originated prior to 2001, you’ll pay MIP for the life of the loan.
So, what should you do if you have an FHA loan and you’d like to end MIP payments? Refinancing into a different loan product may be the answer.
How does FHA refinancing work?
The FHA Streamline Refinance program can help lower your monthly payment. These loans do not require an appraisal, which can be helpful if your home has lost value. This is not a cash-out refinance program, however, and you cannot roll closing costs into the refinanced loan without an appraisal. Basic eligibility standards include having an existing FHA mortgage loan. You can’t refinance from a conventional loan into an FHA Streamline. In addition, you must be current on your monthly payments.
Moving into an FHA Streamline loan does not automatically cancel MIP requirements. In fact, you could wind up paying the same upfront MIP rate of 1.75 percent and your annual rate, ranging from 0.45 percent to 1.05 percent, could stay the same.
For homeowners with older FHA loans, there are financial benefits. If your original FHA loan was originated prior to June 1, 2009, you may qualify for a Streamline loan with upfront MIP of 0.01 percent and an annual rate of 0.55 percent. That equates to a $10 upfront payment and an annual payment of $550 on a loan balance of $100,000.
If you’ve obtained an FHA loan since June 2009, it’s generally wise to refinance sooner rather than later. You are entitled to a refund of a portion of your upfront premium, but only if you refinance within three years of closing the initial loan. The amount you’ll receive drops incrementally, from 80 percent to 10 percent, over the first 36 months after closing.
If you took out a $200,000 loan, for example, you paid $3,500 (1.75 percent) in upfront MIP costs. After one year, you could refinance and get a 58 percent refund, or $2,030, that would be applied to the upfront MIP on your Streamline loan. But if you waited two years to refinance, your refund would be only 34 percent, or $1,190.
An FHA Streamline Refinance also can help you pay off the MIP more quickly if the LTV on the refinanced loan has dropped below 90 percent. Remember, newer loans with LTVs at or above 90 percent at closing must be paid for the life of the loan. But those with LTVs below 90 percent have their premiums cancelled after 11 years.
How does conventional refinancing work?
For homeowners who purchased with an FHA loan since mid-2013, or for those who made a small downpayment on their initial loan, using the FHA Streamline Refinance program may not make sense. It may take a lot of time for appreciation and monthly payments to whittle the loan balance down below the 90 percent LTV threshold. Or your LTV may already be at or close to 78 percent, the point at which mortgage insurance premiums no longer apply to conventional loans.
If you have 20 percent equity — or more — in your home, refinancing to a conventional loan could save you a lot of money in the long term by eliminating MIP. Conventional lenders are required by law to cancel mortgage premiums on loans with 78 percent LTV. And you can request early termination of the premiums when you reach 80 percent LTV.
Again, closing costs should play a part in your decision. These costs can be several thousand dollars, depending on your loan amount. If you do not plan to stay in your home more than a few years, the closing costs could outweigh in the short-term whatever you’d save by eliminating mortgage insurance and locking in a lower interest rate. Also, conventional loans require higher credit scores — 620 is normally the minimum and 680 is ideal. Conversely, you can get an FHA loan with a score as low as 500.
Before refinancing, calculate how much you’ll spend in closing costs, then compare it to how much you’ll save on mortgage insurance and other loan costs, such as interest. If you plan to stay in your home for many years, refinancing could be advantageous. But if you’re expecting to move in a few years and are already relatively close to the 78 percent LTV threshold, refinancing might not be a wise move.