When Does PMI Fall Off on FHA Mortgages?

Federal Housing Administration mortgages receive backing from the government to protect lenders in the event of a default. However, for this backing, the FHA charges mortgage insurance premiums, which function similarly to private mortgage insurance. Knowing when the annual mortgage insurance premiums will fall off helps you better budget for the cost of the mortgage.

Avoiding Monthly Premiums

You can avoid paying any annual mortgage insurance premiums on your FHA mortgage if you take out a mortgage with a term of 15 years or less and make a down payment greater than 10 percent. You calculate the percentage of your down payment by dividing the amount of the down payment by the home's value. For example, if you took out a 15-year mortgage on a $200,000 home, you would have to put down at least $20,000 to avoid FHA annual premiums.

Ending Monthly Premiums

If you take out a mortgage with a term longer than 15 years or with a loan-to-value ratio of more than 90 percent, you must pay annual mortgage insurance premiums until your loan-to-value ratio falls below 78 percent. For mortgages with terms of 15 years or less, the premiums fall off as soon as you reach 78 percent regardless of how long you have had the mortgage. For mortgages with terms longer than 15 years, you must pay the premiums for at least five years even if your loan-to-value ratio falls below 78 percent in a shorter period of time.

Loan To Value Ratio

The loan-to-value ratio measures the ratio between the amount remaining on your mortgage and the value of your home. For example, if your mortgage balance equals $190,000 and your home's value equals $200,000, divide $190,000 by $200,000 to find your loan-to-value ratio equals 0.95, or 95 percent. As you pay off your mortgage or the value of the home increases, the loan-to-value ratio goes down.

Tax Deductions For Premiums

If you took out your FHA mortgage after 2006, your FHA premiums qualify as costs you can deduct for the mortgage insurance premium deduction. To be eligible to deduct your FHA premiums, your adjusted gross income must be less than $100,000 ($50,000 if married filing separately) as of 2011. To claim the deduction for FHA premiums, you must itemize your deductions with Schedule A and report the amount of FHA mortgage insurance premiums on Line 13.


About the Author

Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."