CAN I STOP PAYING PMI ON MY FHA LOAN?
The purpose of an FHA loan is to make the purchase of a home more attainable. These loans are very attractive because of low down payments (only 3.5% of the purchase price) and their availability to buyers with less-than-perfect credit. But the reason that banks are able to offer these convenient loans is because they have a safety net by requiring you to pay PMI (private mortgage insurance.) This insurance means that the bank is protected against any event in which you may be unable to make your mortgage payment.
But PMI is really expensive! In addition to the 1.75% charged up front (which means $1750 on for every $100,000, just to keep things in perspective), you will also need to pay $1.35 annually on a 30-year loan.
Understandably, many buyers would like to find some way out of this expensive quagmire. There are several potential options to explore if you are one of them.
Wait It Out. Once you have earned 78% equity in your home, the mortgage servicer is required to automatically terminate your PMI. There are just a couple of caveats though. This only applies to FHA loans with mortgages that predate June 3, 2013. Also you are only eligible for this automatic termination if you have a good payment history.
Request PMI Cancellation. Once you have paid down 80% of the home’s value, you have the option to request cancellation of your PMI. The request has to be made in writing. You can speed up this process by pre-paying on your loan in order to bring down the balance. An increase in your home’s value can also mean you may be eligible for PMI cancellation. Get an appraisal to see if the loan-to-value ratio has changed since you bought your home. You can also add value to your home by renovating with an added room or other upgrades.
Another way to find relief from PMI is by refinancing into a different kind of loan. Switching from an FHA loan to a conventional home loan (like Fannie Mae or Freddie Mac) may significantly reduce your costs, mainly because of lower mortgage insurance rates. If pursuing this route, make sure to shop around. Different lenders will provide you with different offers and quotes.
The rules and policies governing FHA loans and mortgage insurance are in a constant state of flux. But, there are several different options to explore if you are interested in reducing or eliminating your mortgage insurance. Don’t hesitate to ask for help from a professional in navigating the murky and constantly-changing waters of FHA loans and PMI.