A Federal Housing Association, or FHA, loan can give people without a lot of savings or credit the opportunity to buy a house with a low down payment. This loan has a lot of advantages for certain types of borrowers, but it also comes with the required expense of private mortgage insurance, or PMI. Here is how to get rid of PMI on an FHA loan:
What Is PMI On An FHA Loan?
PMI is a type of insurance that protects the lender against the risk that a borrower will stop paying their mortgage payments, and it can add hundreds of dollars onto a person’s monthly mortgage payment. However, it is not permanent; there are several ways borrowers can eliminate PMI from their FHA loan.
How Do I Remove PMI From My FHA Loan?
There are two categories for FHA loans: those that were issued up to June 3, 2013, and those whose applications are dated after that point. On that date, FHA rules changed that impact the options for removing PMI.
Most FHA homeowners fall into the latter category. Thirty-year FHA loans that were taken out after June 2013 with less than 10 percent down are not eligible for automatic mortgage insurance cancellation. However, there are no restrictions stopping homeowners from refinancing out of an FHA loan into a conventional loan that does not have PMI. FHA loans do not have prepayment penalties, so borrowers can refinance any time they choose.
Under favorable market conditions where home values are rising, some homeowners find that a house that they put 3 to 5 percent down on just a few years earlier has enough equity to allow them to refinance without PMI. Only 20 percent in equity is needed to do so.
Those who received their FHA loans prior to June 2013 become eligible for PMI cancelation after five years as long as they have built 22 percent equity in the property and have made all of their payments on time.
The Homeowners Protection Act (HPA) gives homeowners two ways of taking PMI off their home loan. A final or automatic PMI termination can be granted when they reach certain home equity milestones, or the borrower can ask for it to be removed when they achieve 80 percent equity. Outlined below is a closer look at some of the options.
Refinance Your Loan From FHA To A Conventional Loan
Some homeowners choose to take advantage of low mortgage rates and refinance their mortgage. Borrowers who have paid their loan down to 78 percent of the value of the home are eligible to refinance into a conventional mortgage without needing to pay PMI.
Reduce Your Loan Balance To 80 Percent Of Home Value
Homeowners who are making their payments on time can determine the date they will reach 80 percent using their PMI disclosure form. If this figure is unavailable, it can be requested from the loan servicer.
Those with extra cash can reach this point faster if they make additional payments. For example, prepaying the principal on the loan reduces the balance, and this can allow homeowners to build equity faster and save money on interest payments. Even paying just $50 a month extra can be enough to see the loan balance and total interest paid drop.
Some borrowers might put a lump sum toward the principal of the loan or come up with an extra mortgage payment each year to reach the 20 percent equity level more quickly.
Wait Until Your Loan Reaches Its Midpoint
The HPA requires a mortgage lender to drop PMI when a mortgage balance hits 78 percent of the home’s original purchase price as long as the borrower is in good standing. They are also required to do so at the halfway point of the amortization schedule. Those with a 30-year loan will reach the midpoint after 15 years. Even if the mortgage balance has not risen to 78 percent at this point, the lender must still cancel the PMI in what is known as final termination.
Get Your Home Value Reappraised By A Professional
Homeowners who live in an area where home values are rising may choose to have their home’s current value reappraised by a professional. Those who have owned their home for at least two years and have 75% LTV (loan-to-value) can cancel PMI based on current value; those who have owned their home for more than five years may cancel at 80% LTV.
Eligibility Requirements For Removing PMI
Once they reach 20 percent equity, homeowners must request cancellation of the PMI in a written letter to the lender. They must have a good payment history, be current on their payments and meet other requirements, such as not having any liens on the property. A home appraisal may also be necessary; those whose home values have dropped might not be allowed to cancel their PMI.
Speak With A Professional Mortgage Brokerage About How To Get Rid Of PMI On An FHA Loan
If you would like to learn more about getting rid of the private mortgage insurance on your FHA loan, get in touch with the professional mortgage brokerage at My Lending Pal to explore the options that are available in your case.