How to Remove your FHA Mortgage Insurance

One of the most common questions asked by FHA borrowers is how and/or when can they remove their monthly mortgage insurance. Mortgage Insurance serves a very good purpose. It allows potential home buyers with only 3.5% down payment to buy a home. 
To truly avoid mortgage insurance a down payment of 20% would have been needed, which can take a long time to save. But for those who did use FHA financing to purchase their home what happens when property values increase to the point that their loan is less than 80% of the new appraised value? Can’t they ask their lender to drop the mortgage insurance? No. Not exactly. But there are solutions that may make sense and are worth looking into, and Majestic Home Loan can help.

Short History on FHA Mortgage Insurance Rates

Not too long ago FHA mortgage insurance wasn’t too expensive. Prior to October 4, 2010 the standard rate used was .55% of the loan amount. This meant that on a $300,000 FHA loan the monthly mortgage insurance was only $137. ( .0055*$350,000/12 = $137). That is really a great price for the opportunity to put only 3.5% down on a home. In October 2010 the rate was increased to .9%.  Loans with FHA “case numbers” pulled prior to October 4 2010 were grandfathered into the old .55% rate, but case numbers pulled after got the .9%. That same $300,000 loan amount would have a $225 mortgage insurance payment each month. Only 6 months later, in April 2011 the rate increased again to 1.15%, or $287 a month on a $300,000 loan amount. In June 2012 the rate increased again to 1.25%, or $312 per month on a $300,000 loan. And in April 2013 the rate increased again to 1.35%, or $337 per month on a $300,000 loan. In less than three years the monthly mortgage insurance on a $300,000 loan increased from $137 to $337. And when you consider that in high cost areas like Orange County, CA, where the FHA loan limits were as high as $729,750 in 2013 (and the mortgage insurance rates were even higher for loans over $625,500 at 1.55%), the monthly mortgage insurance was as high as $942 per month. The 2014 FHA loan limits are now $625,500 in Orange County, CA.

Rules for Removing FHA Mortgage Insurance

First, it depends on when your loan was originated and endorsed by FHA. If your loan was prior to June 3, 2013, then the following is required for a 30 year amortized loan.
  • The mortgage insurance is automatically removed once the loan reaches 78% loan to value and has been paid for a minimum of 5 years. The 5 year requirement is often over looked by borrowers who think that a quick appreciation increase should be enough to have it removed. But the real kicker is the the value is based on the original purchase price, NOT the current appraised value. Unless the borrower is making extra payments to principal, it will take approximately 11 years to reach 78% loan to value if the loan started out with 3.5% down payment.
If your loan was endorsed after June 3, 2013 and you put less than 10% down when you bought the home then you are out of luck. The mortgage insurance will remain on the loan until it is paid off.

So What is the Quickest Way to Remove Mortgage Insurance?

Refinancing out of the FHA loan is the quickest way to remove the mortgage insurance. Some areas of California have experienced such quick appreciation in values that even people who bought homes 12 months ago may have enough equity to refinance into a Conventional loan. Even with only 10% equity it may be possible to refinance into a “combo” loan scenario with a first mortgage and equity line 2nd mortgage. The downside to all this is that interest rates are higher in 2014 than they were in most of 2012 through 2013. But for many, the savings from eliminating mortgage insurance more than offsets the cost of a higher rate.
As with all types of mortgage financing, the pros and cons should be carefully evaluated. Refinancing out of FHA is not for everyone. It depends on the rate difference between the FHA loan and the new Conventional loan. It also depends on the borrower's credit. FHA is far more flexible with prior credit issues than Conventional financing, so someone who had a previous short sale or foreclosure may be hindered.  But it is definitely worth have a lender like Majestic Home Loan present a thorough analysis of your options. A “Side by Side” analysis comparing the FHA loan to a Conventional loan should be prepared based on the borrowers long term goals with the home. Contact one of our experienced loan officers here at Majestic Home Loan, at 1-855-971-0999 and see how much you can save today. Who knows, maybe it could end up savings thousands of dollars.
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