FHA mortgages give borrowers a chance to own a home without putting a lot down. Those who have a hard time saving for a down payment only need 3.5% to purchase a home. On a $150,000 home, this equals $5,250. This low down payment makes owning a home easier to afford. In exchange, however, you have to pay FHA mortgage insurance. This insurance premium can add a significant cost to your monthly mortgage payment. Unfortunately, in most cases, it never stops.
When Did you Close on Your Loan?
When you closed on your FHA loan determines if you can drop the insurance premium. Loans originated prior to June 3, 2013 have this benefit. In fact, they only have to pay mortgage insurance premium for 5 years on a 30-year loan. If you have a 15-year loan, you do not have to pay the premium for a specific time. However, the catch is you cannot owe more than 78% of the value of the home. The value the FHA uses is the last appraised value. Unless you refinanced since you bought the home, this means your purchase appraisal. If you paid your loan down enough that you are at less than 78% of the value, the FHA must cancel your insurance premium.
If you closed on your loan after June 3, 2013, you are not as lucky. Unfortunately, you have to pay the insurance for the life of the loan. The exception to the rule is if you have a 15-year term. If you borrowed less than 78% of the value of the home you do not pay any insurance. If you borrowed up to 90% of the value of the home, you pay insurance for 11 years. The same is true for 30-year terms with an LTV up to 90%. These circumstances are rare though.
In order for the FHA loan to make sense, borrowers usually only put down the minimum 3.5%. These are the borrowers that want to stop the premium. As it stands now, they must pay it for the life of the loan.
Stopping Insurance Premium Now
The good news is there is a way to stop insurance premium now. It does require some work on your part, though. You have to refinance. Not everyone will be eligible to do this. You need to get out of the FHA program. This leaves you with conventional financing. Because this financing also has mortgage insurance, you need to wait until you have a loan-to-value ratio lower than 80%. Once you reach that point, you can refinance without any insurance. This could save you thousands of dollars over the life of the loan.
When you apply for a conventional refinance, your lender will order a new appraisal. If you owe less than 80% of the value, you just need to qualify for the loan. To better your chances of a conventional loan approval, you need:
- Good credit
- Low debt ratio
- Assets for reserves
- Stable employment
- Steady income
What if you owe more than 80% of the value of the home? Are you stuck with the FHA insurance? The choice is yours. Either way, you will pay insurance premiums. Conventional loans charge Private Mortgage Insurance. The difference is this insurance cancels once you owe less than 80% of the value of the home. If you do not ask for cancellation of the insurance, the lender has to cancel it at 78% LTV by law.
The difference between the amount of PMI and FHA mortgage insurance premium you pay depends on your circumstances. In some cases, the PMI costs less. If you have good credit and a low LTV, this is usually the case. If you have a high LTV and poor credit, though, FHA insurance is more affordable.
Paying Your Loan Down Faster
You can see the common denominator is paying your loan balance down. There are several ways you can do this faster. Of course, you can follow the amortization provided with your loan or you can speed things up. Here are a few simple ways to pay your loan down faster:
- Pay a little extra towards the principal each month (base it on how much you can afford)
- Divide one mortgage payment by 12 and pay that amount in extra towards your principal each month
- Pay one full extra mortgage payment each year all at once
If you have a windfall, such as a bonus or tax refund, you can also apply that amount to your principal balance to pay it down faster.
The faster you pay the principal down, the faster you can put an end to paying the mortgage insurance premium.
Even if you think the mortgage insurance you pay each month is not a lot of money, add it up over 30 years. For example, let’s say you pay $75 a month in insurance. If you have a 30-year loan, this equals $2,250 over the life of the loan. If instead, you could put that $75 towards your principal, you could pay your loan off faster. This would result in paying less interest as well, which would put more money in your wallet over the life of the loan too.
If you want to stop paying mortgage insurance premium, you have options. You have to figure out what is right for you. Some people cannot afford to make extra payments towards their principal, especially if they pay MI. If that is the case, just wait it out. As soon as you know you owe less than 80% of the value of the home, refinance. If you refinance before then, you may see that magical 80% number even faster because you will get a new appraisal with the refinance. If your home appreciated since you purchased it, this would put you that much closer to the end of mortgage insurance.
Talk to your lender to see what options you have to make affording your mortgage payments without mortgage insurance a reality!