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If you're looking to reduce insurance payments on your FHA mortgage, your best options are either to refinance into a conventional loan, or, if you're eligible, to outright cancel the insurance. To refinance into a conventional loan, you'll need 20% equity in your home. To cancel your insurance and stay with the FHA loan, you'll need 22% equity and a loan issued before June 3, 2013. For FHA loans issued after this date, insurance is required for either the life of the loan or 11 years.
- Are You Able to Lower Insurance Premiums on an FHA Loan?
- How to Reduce or Remove Insurance Payments on an FHA Mortgage
FHA Insurance Requirements: Are You Able to Reduce It?
First, let's determine if you meet the criteria for lowering your insurance premiums. For most borrowers who choose to stay with an FHA mortgage, paying mortgage insurance is a necessary tradeoff for making a low down payment. As such, FHA loan borrowers who took out a mortgage after June 3, 2013 are unable to cancel their insurance unless they made a down payment greater than 10% of the home's price. In these cases, insurance can be canceled after 11 years, which at the earliest is in 2024. For those who made a down payment smaller than 10%, FHA mortgage insurance is required for the life of the loan.
|Date Issued||Term Length||Down Payment||Insurance Requirement|
|After June 3, 2013||30 years||Less than 10%||Life of the loan|
|After June 3, 2013||30 years||More than 10%||11 years|
|After June 3, 2013||15 years||Less than 10%||Life of the loan|
|After June 3, 2013||15 years||More than 10%||11 years|
|Before June 3, 2013||30 years||Less than 22%||Until 78% LTV, or 5 year minimum|
|Before June 3, 2013||30 years||More than 22%||Life of the loan|
|Before June 3, 2013||15 years||Less than 22%||11 years|
|Before June 3, 2013||15 years||More than 22%||No insurance required|
For homeowners who took out their loan before June 3, 2013, FHA mortgage insurance must only be paid until 22% home equity is reached. In other words, you no longer have to make insurance payments if the outstanding balance of your loan is less than 78% of your home's original price.
Reducing or Removing FHA Mortgage Insurance
To remove insurance payments, homeowners with over 20% equity and mortgages issued after June 3, 2013 should consider refinancing into a conventional mortgage. Borrowers with low equity, or who might not qualify for a conventional mortgage, should consider an FHA Streamline Refinance, which is a government-backed program designed to reduce monthly mortgage payments. In general, homeowners should consider whether refinancing their mortgage and removing insurance will yield substantial enough savings.
Refinance Into a Conventional Mortgage
Refinancing into a conventional mortgage is recommended for homeowners who have significant equity in their home, and for whom the savings from a refinance will greatly outweigh the expense of closing costs and other expenses. For example, a homeowner with mortgage insurance but an interest rate of 3.5%, rather than 2017's rate of around 4%, might be better off paying down their insurance.
In contrast to FHA requirements, insurers of conventional mortgages require that borrowers have a 20% stake in their home before they stop paying mortgage insurance. This is because conventional loan borrowers are typically seen as safer investments for lenders, so the insurance requirements are less stringent. Accordingly, if you're paying for FHA mortgage insurance and own more than 20% of your home, refinancing into a conventional mortgage could potentially save you money.
However, before refinancing, it's important to consider the overall costs associated with changing your mortgage—not just FHA mortgage insurance. Other expenses like interest rates, transaction costs and lender fees might make a refinance more expensive than paying out the mortgage insurance for the duration of your loan's term or until the requirement expires. For example, a 1% interest rate increase from your current loan could increase your total cost by thousands. Additionally, if the projected savings of refinancing into a conventional mortgage are only marginal, it might not be worth the time and effort that's required to switch your loan.
Cancel Your FHA Mortgage Insurance
As mentioned above, to cancel FHA mortgage insurance outright in 2017, you'll need to have a loan issued before June 3, 2013. Otherwise, homeowners are required to pay for mortgage insurance for either 11 years or the life of the loan. Unfortunately, for those who made the minimum FHA down payment of 3.5%, paying for mortgage insurance for the life of the loan is a necessary service charge for taking out an FHA mortgage. To remove insurance entirely, the best course of action if you made a low down payment is to pay the insurance fees until 20% equity is reached, and then consider refinancing into a conventional mortgage.
One potential benefit of waiting to refinance is that your current interest rate could be lower than the one you'll receive in a refinance. Even though FHA mortgages tend to have higher interest rates than conventional mortgages, there might not be a favorable difference between the refinance cost and the insurance premium cost. One way to calculate the savings of canceling your insurance and refinancing is to get quotes from a few banks to compare their rates against your interest and annual premium. The table below shows the cost of FHA premiums according to loan type and down payment size.
|Loan Term||Down Payment||Annual FHA Premium|
|30 Years||Less than 5%||0.85%|
|30 Years||5% or more||0.80%|
|15 Years||Less than 10%||0.70%|
|15 Years||10% or more||0.45%|
FHA Streamline Refinance
An FHA Streamline Refinance is a good option to reduce mortgage costs for homeowners whose mortgage rate is higher than the current rate, or who owe more on their mortgage than their house is worth. While an FHA Streamline Refinance won't necessarily reduce your insurance payment, it can reduce the overall cost of your mortgage. As such, the FHA requires that homeowners receive a money saving benefit from the Streamline Refinance in order to be eligible.
In contrast to conventional refinances, the streamlined process allows borrowers to refinance their mortgage with limited paperwork, minimal credit reporting and no required appraisal. The requirements for qualification are as follows:
- The homeowner's mortgage must be FHA insured
- The loan cannot be delinquent—but it can have a LTV over 100%
- The refinance must result in a "net tangible benefit" to the borrower
In general, refinancing is a great option to reduce insurance fees and general insurance costs, but it's not necessarily the right option for everyone. If your mortgage was issued after June 3, 2013 and you also don't qualify for a refinance, you can pay down your insurance until you have the equity, credit score or financial qualifications to get out of your FHA loan. Interest rates over the past few years have been at historical lows, so pushing off a refinance and paying your current low interest rate can also have financial benefits.