Canceling FHA mortgage insurance seems the be the first thing Orange County FHA borrowers want to know about after they have bought their home. FHA mortgages offer very attractive interest rates and with less demanding qualification requirements to allow first time home buyers and borrowers with less than perfect credit the opportunity to get into the real estate market. FHA allows Orange County home buyers to get a mortgage with a down payment as low as 3.5% as well as allowing borrowers to refinance without appraisal. The only real caveat to FHA mortgages is that the Mortgage insurance premiums are typically higher than other mortgage programs. Since FHA is essentially an insurance policy to lenders due to the higher risk potential borrowers, the higher insurance premiums are an essential aspect to the program.
Types of Mortgage Insurance Premiums
FHA has two different types of Mortgage insurance premiums, or MIPs, that are required as a part of an FHA mortgage. The first of these MIPs is the Up Front Mortgage Insurance Premium which is paid at closing. This premium is 1.75% of the loan amount and is financed into the loan amount. The second of these MIPs is the annual mortgage insurance premium. This is paid monthly as a part of your monthly loan payments. Rates for annual MIPs on a 30 year fixed rate term have ranged between .55% and 1.35% since 2008. Currently the annual mortgage insurance rate for 30 year fixed FHA loans is .85% for down payments less than 5%, and .8% for down payments more than 5%.
With Conventional loan programs it is possible to cancel the private mortgage insurance payments of your mortgage once you have 20% equity on your home, meaning the loan balance has reached 80% loan to value. FHA mortgage insurance premiums are now permanent for most mortgages, but it may be possible to cancel MIP on your FHA mortgage depending on when your most recent FHA loan was originated.
For FHA loans made prior to June 3rd, 2013 there is a set of timeframes for when MIP’s will be eliminated from your FHA mortgage. Loans made prior to June 3rd which are on a 30 year term will have their MIP cancelled when the loan reaches 78% loan to “original” value (based on the original value/purchase) and the annual MIP payments have been made for at least 5 years. For loans with a 15 year term, MIP will cancel as soon as the loan reaches the 78% loan to value requirement. It is very important to make it clear that FHA looks at the original property value at the time of the original FHA loan origination. For example, if you bought your home for $400,000 and it appraised for $400,000, then your loan amount needs to be $312,000 before the MIP is cancelled. FHA does not look at the current appraised value. For example, if the home is now worth $500,000 and you are thinking “hey, I’m under 78% loan to value based on the new value”, that’s not how it works. It also important to remind you that the above rule only works if your loan was originated prior to June 3rd 2013. If you bought your home after that then the FHA mortgage insurance is permanent.
Refinancing to cancel MIPs
If your FHA loan was made after June 3rd, 2013 then your best option to get out of MIP payments is to refinance out of the FHA loan. Home values have increased in the past several years so homeowners with FHA mortgages stand to potentially save a significant amount of money by refinancing. By refinancing to a Conventional mortgage program borrowers are able to save a significant amount of money over the remaining life of their mortgage. With a Conventional loan Private Mortgage Insurance rates are much lower than FHA MIP payments. It is often a possibility to refinance into a conventional loan with as little as 5% equity in your home. Once you refinanced into a conventional loan you would typically have to pay traditional PMI for about 2 years. As soon as you have reached 78% to 80% loan to value you can cancel the PMI on your loan.
Your situation may be different. The best bet is always to contact an Orange County loan officer who can answer your questions and provide loan scenarios for you.
Authored by Tim Storm, an Orange County VA Loan Officer specializing in VA Loan. MLO 223456. – Please contact my office at the Home Point Financial. My direct line is 949-640-3102. www.OrangeCountyVALoans.com. I will prepare custom VA loan scenarios which will be matched up to your financial goals, both long and short term. I also prepare a Video Explanation of the your scenarios so that you are able to fully understand the numbers BEFORE you have started the loan process.