A common question among FHA borrowers is "how can I remove the FHA mortgage insurance on my loan?" There are a few answers to that question, and it depends on a few things.
Just a Few of the Questions that will lead to the Answer
When did the FHA loan close? What is the term of the loan? What was the loan to value of the loan when it was first taken out? What was the appraised value/purchase price of the home when the loan was first taken out? What is the current balance of the FHA loan? Have the payments been made on time for the last 12 months?
If is important to note that the current property value doesn't matter too much if the FHA borrower is trying to remove the mortgage insurance. At least, not if they are planning to keep their FHA loan. As we'll get into below, the way that most homeowners will eliminate their FHA mortgage insurance is through refinancing out of FHA and into a Conventional loan.
If your FHA loan closed prior to June 3, 2013, then the mortgage insurance will go away when the following conditions are met.
- If your loan is a 30 year term then the monthly mortgage insurance is cancelled by FHA once your loan balance reaches 78% of the "ORIGINAL" appraised/purchase value AND you have been in the loan for a minimum of 5 years. Notice that the current value does not matter. Unless the borrower is making extra payments to principal each month, then a typical 96.5% LTV FHA loan would take approximately 11 years to reach 78% loan to value.
- If your loan is a 15 year term, then you have the same 78% LTV requirement, but you are not required to be in the loan for 5 years. A 15 year fixed with 3.5% down would reach 78% LTV in just under 4 years.
- In either case, the mortgage payments need to have been made on time for the previous 12 months.
The Fastest Way to Eliminate FHA Mortgage Insurance
Since most FHA loans are 30 year amortization and initially were 96.5% loan to value (3.5% down payment), the fastest way to get rid of FHA mortgage insurance is to refinance into a Conventional loan. Or for those who are eligible, the refinance into a VA home loan. Refinancing from an FHA loan into a VA loan can save hundreds of dollars a month. Orange County has experienced solid real estate appreciation in 2013, which has resulted in many FHA borrowers having enough equity to take advantage of a refinance. Even for those FHA borrowers who are not quite at 80% loan to value, there are options where they can refinance to a Conventional loan and "buy out" the mortgage insurance. Many people are also using a "piggy back" program, where an equity line is combined with a Conventional first mortgage, thus allowing a refinance to 90% of the properties value with no monthly mortgage insurance.
It is definitely worth checking into your options while interest rates are still fairly low. Contacting a local Orange County home loan specialist is who can provide custom side by side loan scenarios will help the FHA borrower determine whether a refinance makes financial sense.
Authored by Tim Storm, an Orange County, CA Mortgage Loan Officer MLO 223456 - Please contact my office at Home Point Financial Direct line at 949-640-3102. www.OrangeCountyVALoans.com