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When Can I Drop My FHA Mortgage Insurance?
Why Pay Mortgage Insurance?
There are many advantages to getting an FHA loan in today’s market. Low interest rates, small down-payments, expanded credit and income standards, and higher allowable loan amounts are just some of the reasons why FHA loans continue to grow in popularity.
FHA loans are insured by the federal government. And the government, understandably, requires mortgage insurance to be paid in order to off-set their lenient approval guidelines.
Typically, there are two types of mortgage insurance associated with FHA loans:
- Upfront Mortgage Insurance Premium – This is a onetime fee that is added to a borrower’s loan balance when the loan is originated. It is 1% of the loan amount and mandatory on all loans.
- Annual Mortgage Insurance Premium (MIP) – This is paid monthly as part of a borrower’s mortgage payment. The amount varies depending on the parameters of the loan.
The idea of paying mortgage insurance is a turn-off for some. But paying it allows many borrowers, who can’t accomplish their goals within the confines of conventional lending guidelines, to obtain very attractive financing. Plus, the mortgage insurance on these loans may be tax deductible (be sure to check with your accountant).
When Will the MIP be Removed?
Thankfully, the Annual MIP is not permanent. It is automatically removed by the FHA after certain criteria is met. Borrowers do not have to contact the FHA to have it removed.
Here is a breakdown of when the FHA will automatically drop MIP:
- Loan terms > 15-year: MIP must be paid for a minimum of 60 months. After the monthly MIP has been paid for 60 months and the loan dips to 78% loan-to-value (LTV) the MIP is removed
Loans originated under 78% LTV still need to carry the MIP for 60 months
- Loan terms < to 15-year: After the loan dips to 78% LTV the MIP is removed.
Loans originated under 78% LTV are not required to pay MIP
The FHA will use the lower of the purchase price or the original appraised value when determining when a loan has reached 78% LTV. They do not accept new appraisals.
Typically, the benefits of an FHA loan outweigh any mortgage insurance that needs to be paid. FHA loans give homeowners and home buyers more borrowing power than most other options. And FHA rates are currently better than conventional and VA rates. The fact that the Annual MIP can be dropped in the future is a bonus.
Meridian Home Mortgage has a team of Personal Advisors ready to answer your questions. Call today to see how an FHA loan can benefit you.