FHA mortgage insurance keeps your lender from taking a hit if you stop paying your mortgage. Although the insurance covers the lender, you’re the one paying the premium. But you don’t have to pay forever. The FHA has guidelines to determine when the lender can let you off the hook. Another option is to refinance your way out.
FHA Mortgage Insurance Overview
FHA mortgage insurance protects lenders from losing money when borrowers default on their loans. The insurance encourages lenders to make more loans. It also allows them to make loans to buyers who have little cash to put down or whose credit scores disqualify them for conventional financing. In most cases, borrowers pay an upfront premium at closing as well as annual premiums that are included in their mortgage payments.
Automatic Premium Cancellation
If you closed on your loan on or after Jan. 1, 2001, the FHA cancels your premiums when you reach a certain point in your amortization schedule. This schedule predicts your loan balance after each scheduled payment. When you make the payment that brings your equity to 78 percent of your purchase price or the appraised value of your home at the time your lender originated your loan, your premium is canceled automatically as long as you've paid your mortgage for at least five years. If your loan’s term is fewer than 15 years, the FHA waives the five-year requirement.
Borrower Initiated Cancellation
Paying some of your mortgage balance in advance may allow you to stop paying your premiums before they’re canceled automatically. The five-year rules apply to an automatic cancellation and a cancellation for which you apply. You initiate the cancellation by contacting your lender to ask for it. You’ll need at least 78 percent equity plus on-time payments for the most recent 12 months.
You can eliminate mortgage insurance premiums with a cash-out refinance using a conventional loan that doesn't require mortgage insurance. This type of refinance replaces your old mortgage with a brand new one. A conventional loan isn’t guaranteed or insured, so you’ll need strong credit and a decent amount of equity to qualify. However, you might have enough equity even if you don’t have the 78 percent the FHA requires. Whereas the FHA looks at the appraisal the lender did when you first applied for your mortgage, the refi lender will order a new appraisal. Your equity will increase automatically if your home's value has increased since the original appraisal. Of course, if your home’s value has tanked, so has your equity. In this case, the new lender might let you pay cash up front to make up the difference.
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