When you take out a loan backed by the Federal Housing Administration, you don't actually get PMI, or private mortgage insurance. Instead, you pay the FHA a mortgage insurance premium, or MIP, in return for the FHA covering your lender against loss. The FHA stops payment of the MIP once you build up a certain amount of equity in the house.
Upfront Premium
You pay MIP in two parts. The first part comes in the form of an upfront premium equal to 1.75 percent of the loan. If you borrow a $200,000 mortgage, for example, your premium is $3,500. Rather than add it to your closing costs, the FHA rolls it into your total loan amount. You pay mortgage interest on the amount of the premium for the life of the loan. This continues until you pay off the loan.
Annual Premium
In addition to the upfront payment, you pay the FHA a monthly premium. The cost of the premium varies according to the length of the mortgage and the size of your down payment. On a 30-year loan where you have less than 5 percent equity in the house, you pay 1.25 percent of the mortgage amount every year. On a 15-year loan with a down payment greater than 10 percent, you only pay .35 percent.
Cancellation
On a 30-year loan, you have to keep your annual premium in place for at least five years before the FHA will consider cancelling it. You also have to pay down your mortgage to the point where your debt is only 78 percent of your home value. The good news is that you don't have to get a new appraisal or worry about dropping home prices; the FHA bases its decision on the original appraisal or purchase price, whichever is less. After paying for five years, when you hit the 78 percent mark, the FHA cancels the premiums automatically.
Considerations
While the FHA bases cancellation on the original amortization schedule, if you paid the MIP for five years and lowered your mortgage to 78 percent ahead of schedule, contact your lender and request cancellation. No matter how much extra you pay, you can't get the FHA to bend on the five-year requirement on a 30-year loan; however, if you have a 15-year loan, the FHA automatically cancels the MIP when the loan reaches 78 percent loan-to-value.
