Mortgages issued by the Federal Housing Administration include mortgage insurance premiums (MIP) that help protect the government from loss of money due to foreclosure. The MIP is similar to the private mortgage insurance (PMI) required on mortgages with some private lenders. The FHA sets specific rules on how long the homeowner needs to pay MIP on an FHA mortgage.
After Five Years
If your mortgage term for your FHA-insured loan is more than 15 years, then you must pay MIP for at least five years. After you have made five years of on-time payments, you are eligible for cancellation if you meet the loan-to-value requirement. If you have a 15-year FHA mortgage, the five-year rule does not apply to you and your insurance will go away as soon as you meet the loan-to-value requirement, even if it has not been five years yet.
78 Percent LTV
Your loan-to-value (LTV) ratio must be 78 percent or less before you can cancel the mortgage insurance premiums. The loan-to-value ratio is the current outstanding balance on the loan divided by the lesser of the original purchase price of the home or the original appraisal value of the home. You cannot use the home's current appraisal value to calculate the LTV for canceling MIP. Therefore, even if your home value has increased and your loan balance is less than 78 percent of its current value, you still have to pay MIP until you have reached 78 percent of the original value.
Calculating Your LTV
The amount of time it will take to reach an LTV of 78 percent or less depends on the amount you put down initially, your interest rate and your loan term. To calculate your target principal balance to get down to 78 percent, multiply the lesser of your purchase price or appraisal value at the time of purchase by 0.78. For example, if you purchased a home for $165,000 and it was appraised for $166,000, you use $165,000 times 0.78 to calculate a target of $128,700. Look up the loan balance on the amortization table for your loan to find out when you will hit that target if you stick to your schedule. If you make extra payments, use your monthly mortgage statements to find your current balance and see if it is low enough.
Mortgage insurance premiums add up to a significant cost, and their removal will help lower your monthly housing expense. FHA loans issued on or after April 18, 2011 have an annual premium of between 0.25 percent and 1.15 percent of the home's value at the time of purchase, depending on the type of loan and initial LTV ratio. For example, if you have a 30-year FHA loan for $165,000 with an initial LTV of 90 percent, your annual MIP cost is $1,815, which is $151.25 per month. When your MIP is canceled, you can spend this money on something else instead.