FHA mortgage insurance removal: Learn different options

If you have a home loan backed by the Federal Housing Administration, you're required to pay FHA mortgage insurance premiums (MIPs). This insurance protects your lender if you fall behind on payments and default on your home loan.

But FHA home loan borrowers who meet specific eligibility requirements may qualify for FHA mortgage insurance elimination.

This guide will discuss who qualifies for FHA mortgage insurance removal, ways to eliminate this expense, and what to expect if you decide to drop MIP.   

What is FHA mortgage insurance?

FHA mortgage insurance is an additional expense that FHA loan borrowers pay. Mortgage insurance protects the lender in the event you stop making payments and default on your loan.

When you close on an FHA loan, you're required to pay an upfront mortgage insurance premium (UFMIP) totaling 1.75% of the loan amount. 

You'll also pay an annual mortgage insurance premium (MIP), ranging from 0.15% to 0.75% of the loan amount. 

The exact percentage you pay depends on your loan amount, down payment amount, and repayment terms. Your annual premium is collected in monthly installments and is built into your monthly mortgage payment.

Because mortgage insurance premiums are an additional expense for homeowners, it’s wise for new borrowers to calculate MIP costs before taking out an FHA loan.

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How to remove FHA mortgage insurance

Some borrowers can eliminate their FHA mortgage insurance premium (MIP).

Here's how: 

Automatic FHA mortgage insurance removal

Some borrowers may qualify for automatic MIP cancellation.  

Eligibility requirements for automatic FHA MIP removal differ depending on the loan's origination date, original down payment amount, and loan-to-value (LTV) ratio. 

Here's an overview: 

If your loan origination date was between July 1991 and December 2000, you must pay FHA MIPs for the life of the loan. 

If your loan origination date was between January 2001 and June 3, 2013:

• For borrowers with loan terms greater than 15 years, MIP will automatically be canceled once you reach a loan-to-value (LTV) ratio of 78% and have made MIP payments for at least 5 years. 
 
• For borrowers with 15-year mortgages, MIP will automatically be canceled once you reach a loan-to-value (LTV) ratio of 78%.  

If your loan origination date was after June 3, 2013 (regardless of the length of the loan term):  

• You can eliminate MIP after 11 years if your original down payment was at least 10% of your home's purchase price.
• If your original down payment was less than 10%, you must pay MIP for the life of the loan.

If your MIP won't cancel automatically, you'll need a different strategy.

Refinancing into a conventional loan

If you don't meet the eligibility criteria above or prefer to eliminate FHA mortgage insurance sooner, refinancing your FHA loan to a conventional loan provides an alternative path.

By refinancing to a conventional mortgage, you'll no longer be responsible for paying FHA mortgage insurance premiums. Before considering this method of removal of FHA mortgage insurance, ensure you understand the refinancing process and the costs.  

Here's a quick overview of what the process entails: When you refinance, you'll end up with one new home loan. Your new lender will pay off your FHA loan, and you'll get a new conventional mortgage with a different rate and different loan terms. You'll need to pay closing costs. 

Considering a refinance? Check out today’s refinance rates. 

A refinance calculator can help you decide if refinancing is a good financial move for you. 

Homeowners must qualify for a new refinance

You must meet the refinance requirements for your new lender. Exact requirements can vary by lender, but generally, lenders prefer borrowers with a credit score of at least 620, a debt-to-income (DTI) ratio that doesn’t exceed 45%, and at least 20% home equity. 

If you don't meet these general eligibility requirements, taking time to improve your credit, reduce your debt, and build more equity can put you in a better position to apply for a refinance. 

Better’s FHA vs. conventional loan guide can help you better understand how FHA loans and conventional loans differ. 

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Benefits of refinancing to eliminate FHA MIP

Several benefits can come from refinancing to a conventional home loan: 

FHA mortgage insurance removal: Eliminating this additional homeowners expense could save you money by reducing your monthly mortgage payment amount. 

Potential to reduce your interest rate: It may be possible to reduce your interest rate, which could help you trim your mortgage bill more. 

Switch from an adjustable-rate loan to a fixed-rate loan: If you have an adjustable-rate FHA mortgage, you may benefit from refinancing to a fixed-rate conventional loan. A fixed-rate loan provides stability with predictable payment amounts. 

How do you refinance an FHA loan to remove mortgage insurance?

Ready to refinance your FHA home loan?  Here’s a step-by-step guide:

Collect loan offers from multiple lenders. Compare the details of each loan, including rates, terms, and closing costs. Better offers quick quotes, online refis, and pre-approval in minutes. 

Pick a lender and submit a refinance application. Be prepared to provide financial documents related to your income, assets and debts. 

Get an appraisal. Your lender will require you to get a new appraisal to determine the current value of your property and calculate the amount of equity you have.

Go through the underwriting process. Your lender will evaluate your financial situation and review your credit report and financial documents. 

Close on your new mortgage. To close on your refi mortgage, you’ll sign paperwork and submit other documentation, similar to when you closed on your first mortgage. 

How long does it take? The refinancing process typically takes somewhere between 30 and 60 days to complete. Having the necessary paperwork and information ready before you start and answering questions from your lender quickly can help move the process along.  

Additional FHA mortgage insurance removal alternatives

If you don't qualify for a conventional mortgage refinance, here are some alternatives: 

FHA Streamline Refinance

If you have an FHA loan and have made at least six months of on-time payments, you may be eligible to do an FHA Streamline refinance. With this expedited refinancing solution, homeowners don’t have to undergo income verification or get a new home appraisal. 

You must be able to demonstrate that refinancing would provide a net tangible benefit, such as a reduced loan term or lower monthly payment. For those who qualify, an FHA streamlining refinance could help you secure a lower interest rate with fewer paperwork requirements.

Review Better’s FHA Streamline refinance guide for more guidance. 

FHA MIP refund

Newer FHA borrowers may be eligible for an MIP refund. If you refinance your FHA loan to another FHA loan within three years of your loan origination date, you can get a partial refund for the Upfront Mortgage Insurance Premium (UFMIP) that you paid.  

Your refund amount depends on how far along you are in your current loan term. Refunds only apply to upfront premiums, not annual premiums, but this could offer some financial relief. 

What to expect after you remove mortgage insurance

Once your mortgage insurance is removed, your monthly mortgage payment amount will decrease by 0.15% to 0.75%. Every dollar saved is a win. Eliminating MIP could help you free up more money for other expenses or to prioritize financial goals. If you’re refinancing to a conventional home loan, any potential savings will depend on your new loan rate and terms. 

Is removing mortgage insurance on FHA a good idea?

For those who qualify, eliminating FHA mortgage insurance costs could offer significant savings. 

But you should verify whether removing this expense will ultimately save you money. If you're considering refinancing your FHA loan, be sure to factor in closing costs when calculating your potential savings. You should also consider how long you plan to stay in your current home. 

FAQs about removing FHA mortgage insurance premiums

Here are some answers to commonly asked questions about FHA mortgage insurance removal: 

Can FHA mortgage insurance go up?

Yes, the FHA can increase FHA mortgage insurance rates. However, rate changes don’t apply to existing FHA mortgages. Rate changes only apply to new FHA mortgages. If you plan to refinance to an FHA mortgage, mortgage insurance rate increases could impact you. 

Is it worth paying PMI or MIP?

Conventional home loan borrowers who make less than a 20% down payment are required to pay private mortgage insurance (PMI) until they reach at least 20% home equity. 

FHA mortgages have low down payment requirements, making homeownership more accessible to a wider range of people. But borrowers must pay mortgage insurance premiums. Before deciding which loan is best for you, consider the pros and cons.

Your lender can help you estimate PMI and MIP costs so you can compare the long-term costs and determine which loan option makes the most financial sense for your situation. For some borrowers, the benefits of owning a home may outweigh the added expense of PMI or MIP. 

If I switch to a conventional loan, will I owe PMI?

If you don't have at least 20% equity in your home when refinancing to a conventional loan, you will owe PMI on your new loan. If you have enough equity, you won't be required to pay private mortgage insurance. 

Eliminating FHA mortgage insurance may provide savings

With benefits like lower down payment requirements and more relaxed credit score requirements, FHA home loans can be advantageous. 

But FHA mortgage insurance premiums can result in increased homeownership costs. If you have an FHA mortgage and are looking for ways to reduce your monthly housing costs, check to see whether you qualify for FHA mortgage insurance removal. 

If you don't qualify for automatic mortgage insurance removal, refinancing is another solution to explore. Just make sure to factor in closing costs when determining if this mortgage insurance removal method will save you money. 

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