A common question among Orange County FHA borrowers is "when will the monthly mortgage insurance drop from my loan?" Many think that when their loan reaches 80% of the properties appraised value the mortgage insurance will drop off. That is not necessarily the case. For one, the target loan to value is 78%, not 80%. Also, there are other requirements which need to be met before the mortgage insurance drops off. The 78% rule is based on the initial purchase price/appraised value at the loans inception. It is not based on the future appraised value. For example, if John Smith buys a beautiful Irvine home for $500,000 and only puts 3.5% down, his initial FHA loan, including the Up Front Mortgage Insurance Premium, would be $487,325. The monthly Mortgage Insurance, currently equal to 1.15%, would be $467. Assuming John does not make extra principal payments, it would take approximately 10 years to reach reach 78% of the $500,000 purchase price, or $390,000.
FHA Mortgage Insurance Remains for Minimum of 5 Years
Now let's assume John does make extra principal payments of $800 per month. By doing this, the loan balance would be paid down to less than 78% loan to value in a little over 5 years. However, this is where the 5 year rule comes into play. FHA requires the mortgage insurance to remain on loans with terms greater than 15 years for a minimum of 5 years. So even though John paid his loan down to 78% loan to value, he would still need to wait until a full 60 months had gone by before his mortgage insurance would drop off. In this example, if he had paid approximately $800 per month extra, his loan balance would be at 78% after 60 months.
Advantage of FHA 15 Year Fixed Program
Of course, if John could easily afford an extra $800 per month, he may want to seriously consider the FHA 15 year fixed program. Interest rates on the FHA 15 year fixed program tend to be .25 to .5% less. Plus, the monthy Mortgage Insurance factor (when putting 3.5% down) is only .5%, or less than half versus the 30 year fixed program. And best of all, FHA does not require a 60 month wait period to cancel MI on the 15 year fixed program. As soon as the loan hits 78% loan to value, the mortgage insurance can drop off. It is important to note that it is the Mortgage Insurance that allows FHA to function. FHA has the most flexible loan guidelines for home buyers putting less than 20% down payment on a home. Not only when it comes to down payment, but also credit and FICO scores, and debt to income ratios. Home buyers who are fortunate enough to have saved (or inherited?) a 20% down payment will not need mortgage insurance. For for those who can afford the mortgage payment but don't want to save, say $100,000 so they can purchase a $500,000 home, FHA is a great program. $17,500 is enough of a down payment for a $500,000 home. The all important first step to help determine what loan options will fit your goals and qualifications, contact a local Orange County FHA loan officer. The loan officer should be able to provide custom loan scenarios which will provide you with a complete breakdown of the purchase price, loan amount, payment, and estimated amount needed to close.
Authored by Tim Storm, an Orange County, CA FHA Mortgage Loan Officer MLO 223456– Please contact my office at Home Point Financial for more information about an Orange County, CA Mortgage. 949-829-1846. www.OCHomeBuyerLoans.com
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