This must be the most misunderstood concept in the entire world of mortgages. Other than “What is your rate today,” this question is at the top for most frequently asked. It is often misunderstood by those working in the mortgage business. Not difficult to see how borrowers might be puzzled. Without any doubt, FHA borrowers are very curious about when they can stop paying this mortgage insurance.
Here’s how termination of FHA mortgage insurance works. Let’s get one thing out of the way quick. Many FHA borrowers have been led to believe they can prove their home has enough value to stop paying mortgage insurance by getting a current appraisal of the home. No, no, no.
You CANNOT get an appraisal of your home in order to stop paying FHA mortgage insurance. FHA could care less what the current value of your home is. You can owe $100,000 and have a home clearly worth $900,000 and you will continue paying the mortgage insurance IF you have not paid the insurance for at least 5 years. AND, you must have paid the mortgage down so that your new balance is no more than 78% of the lesser of the purchase price or the original appraisal value. These are FHA guidelines for mortgage terms greater than 15 years.
What if you have a 15 year mortgage? If you 1st got the 15-year loan and put less than 10% down, you will continue paying mortgage insurance until your new balance is no more than 78% of the lesser of the purchase price or the original appraisal value. But you will NOT have to meet the minimum 5 year requirement noted above.
These rules might aggravate borrowers who meet the FHA 78% requirement, but do not have the 5-year minimum.
If you have the equity in the property, then you should consider refinancing to a standard conventional mortgage. Take a look at how much of a difference it could make.
Do you fall into this category? Refinancing to a conventional mortgage will save you a fortune – especially if your FHA interest rate is considerably higher than current rates. You save both ways: a lower rate and no mortgage insurance.
I can put together some quick numbers for you. Just let me know.
By the way, if you wonder why FHA will only use the lower of the original appraised value or purchase price – as opposed to current value, think about what has happened in the housing market over the past 2 to 3 years. Those inflated appraisal values would have permitted homeowners to stop paying mortgage insurance. With so many foreclosures, this would have been a big cost hit for FHA. I hate to say their policy of not using current value is actually a wee bit sensible.
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{ 5 comments… read them below or add one }
This was good explanation. I thought too I could stop paying that insurance when my home had more value. i will refinance as soon as I have 20%. is that what your saying?
That’s right Marcus. If you have an FHA loan and you want to refinance to get rid of the mortgage insurance, you must have at least 20% equity. For example, if you owe $160,000 on your FHA loan, your home would have to appraise for at least $200,000 in order to refinance to a new conventional mortgage with no mortgage insurance. If you have the value you need, and rates are low enough to make it worthwhile, I suggest you not put off refinancing. The economy is still very fragile. I can help you if the home is in New Jersey. Otherwise, contact another professional and have them review your situation. Good luck.
once i do stop paying the insurance for fha, will i get a refund for what i already paid?
@Lisa. Unfortunately no. That would be generous if so. Like other insurance, during the time when you are paying mortgage insurance, you are covering the cost for a potential loss. Compare to auto insurance. If you sell your car, you would not get back the insurance premium you paid for the prior year. Same for 99% of insurance.
For FHA, in some cases, it is possible to get back the “unearned” premium for upfront mortgage insurance paid at closing. This will vary depending upon whether anything “unearned” remains and what type of subsequent mortgage transaction you enter into.
Hope this was helpful.
all this time i thought i could get my house appraised and stop paying the mortgage insurance on my fha loan. why are mortgage people saying we can get an appraisal? i have heard this from more than one lender. not that i distrust you, but where can i read this from fha? is there a link to fha where i can read it?