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How to Cancel Your FHA Mortgage Insurance: Orange County, CA

A question I am frequently asked is: “How can I cancel my FHA mortgage insurance?” FHA loans have a variety of benefits. More tolerant guidelines, low interest rates and guaranteed mortgage insurance. Orange county homeowners seeking an FHA loan do not need to qualify for their mortgage insurance independently. It’s a package deal. Similar to employer sponsored group health insurance, everyone pays into the same pool. And risk is not assessed on an individual level. Those with “pre-existing conditions” pay the same pre-negotiated rates as those who don’t. Therefore, FHA mortgage insurance is typically more expensive than conventional mortgage insurance. This makes Orange County residents eager to eliminate or reduce this payment. 

So how do you cancel FHA mortgage insurance? The answer depends on your loan terms. But the good news is that FHA mortgage insurance is not permanent.

What is mortgage insurance in the first place? Why do homeowners pay it and who does it protect? Generally speaking, mortgage insurance is required for higher risk loans that exceed 80% loan-to-value. If you don’t have 20% to put down on a home, it’s okay. This is where mortgage insurance comes into the picture. You see, FHA doesn’t purchase mortgages, it insures them. They set the guidelines that banks must follow when underwriting these loans.

If the homeowner defaults on the mortgage payment then FHA pays the bank for their losses. These losses are paid from the pool of annual mortgage insurance dues and mortgage insurance premiums.

So, mortgage insurance does not protect your home or your possessions. It protects the banks against the increased risk of loss.

CANCELING YOUR FHA MORTGAGE INSURANCE

The law provides 2 situations in which borrower paid mortgage insurnace may be canceled. It can be automatic or by request.

  • Automatic. In general, when the homeowner’s equity position reaches 22 percent of the original value of the property, the mortgage servicer must automatically cancel the PMI. For automatic cancellation to apply, the borrower must be current on their mortgage payments over the past year.
  • By Request. Homeowners can request cancellation of the PMI when their equity position reaches 20 percent of the original value of the property, if they meet certain criteria.

FHA Mortgage Insurance Reduction Strategy #1

In order to cancel your FHA mortgage insurance you’ll need to check the terms of your loan.

For mortgages with terms > 15 years, the annual mortgage insurance premiums will be canceled automatically when

1) The loan-to-value reaches 78%, AND

2) Provided the homeowner has paid the annual MIP for at least (5) five years.

For mortgages with terms ?15 years, the annual mortgage insurance premiums will be canceled automatically when the loan-to-value reaches 78%. The homeowner does not need to keep the insurance for a minimum of 5 years.

Once your loan reaches 78%, then FHA will remove the mortgage insurance from your payment. There is nothing for you to do. However a little diligence and follow-up never hurts. The 78% is based on the initial amortization schedule, and does not take account of extra payments. Keep an eye on your amortization schedule and know when your loan will hit 78% and the mortgage insurance should be removed. This cancellation rule applies only to FHA’s mainstream insurance program. It does not cover mortgages on condominiums or Section 203(k) rehabilitation loans, among others.

FHA Mortgage Insurance Reduction Strategy #2

Does it kill you to wait until your loan reaches 78% loan-to-value? Are you anxious to drop your mortgage insurance? Maybe you’ve watched home values appreciate in your Orange County neighborhood over the past 5 years. You know that your loan-to-value is 80% or less. Once the 5 years have passed you can request your bank removes the FHA mortgage insurance at that point. You’ll need to furnish proof of the increased home value. To do this you’ll have to pay for a new appraisal. If you meet the criteria then this can cut years off your mortgage insurance payments. That equates to tremendous savings!

FHA Mortgage Insurance Reduction Strategy #3

If you can afford a higher monthly payment, you should consider a 15 year mortgage. Interest rates, mortgage insurance rates and mortgage insurance premiums are all lower than a comparable 30 yr. fixed FHA loan.

Paying down your mortgage to 78% loan-to-value takes 43 months with a 15 year fixed at today’s rates. A 30 year fixed would take 107 months, or nearly 9 years. This eliminates up to 5 years of monthly mortgage insurance payments. Play with it yourself at www.freeamortizationschedule.net To see what kind of rates/programs you qualify for you can contact me.

In the final analysis, it’s important for Orange County residents to review the program options. There are pro’s and con’s to each one. Mortgage insurance can vary substantially between conventional and FHA loans. By comparing your options you’ll understand the short term and long term benefits of each.

Scott Storace

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