FHA loans have many benefits. They tend to have great rates and they are often the best option for families who don’t have a lot of money to put down when purchasing a home. However FHA loans also have mortgage insurance. The FHA keeps itself funded using the mortgage insurance fees it collects from borrowers. So the question that many borrowers who have FHA loans ask is, when and how can I drop this FHA mortgage insurance? Here are some answers:
When can I drop my FHA pmi?: Within the first five years of having an FHA loan the only way to get rid of PMI is to refinance to a conventional mortgage. And that only will work if the you have built up more than 20% equity. If lack 20% equity you would still need mortgage insurance with a conventional loan. The FHA currently has a minimum 5 year term on FHA mortgage insurance regardless of how much equity is built up in that time. In markets where housing values are not increasing quickly that normally means borrowers are best off just waiting. But housing values are starting to increase quickly in some areas of the country so in some cases borrowers are building up 20% equity in just a couple of years. If you have an FHA loan now and believe you might have more that 20% equity in your home contact us in the sidebar.
Note: This five year rule applies to current FHA loans. Starting in June 2013 the FHA will be making their pmi last for the life of the loan on all new FHA refinances or purchases.
How do I get rid of my FHA pmi?: After 5 years the FHA mortgage insurance should drop off automatically IF the principal balance is down to 78% of the value the FHA has on record for the home. That last part in important. Here is an example: Lets’ say a home was purchased in 2010 for $250,000 and was appraised at about the same value at the time. The FHA will have that $250,000 value on record and the balance of the loan would have to be 22% less than that (about $195,000) for the mortgage insurance to automatically drop off after 5 years. This would be true even if the home could appraise for more today. For instance, even if that home could appraise for $325,000 today the FHA still uses the original $250,000 value when determining when to automatically drop their mortgage insurance.
Again, in areas where home values are increasing it might make sense to refinance out of the FHA loan to get rid of the PMI rather than wait the 5-10 years for it to drop off on its own. Contact us if you have an FHA loan and think you might have 20% equity in your home soon. Rates on Fannie Mae loans with no PMI are excellent right now and could be very worth your while.