How Long Do You Pay PMI on an FHA Loan?
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FHA loans require private mortgage insurance (PMI) for borrowers who put down less than 20 percent. How long do you have to pay PMI on an FHA loan?
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Introduction
The Federal Housing Administration (FHA) is a popular choice for first-time homebuyers. It requires a smaller down payment than conventional mortgages, and you can qualify with a lower credit score. But there are other considerations, such as the type of loan you get.
What is PMI?
Private Mortgage Insurance (PMI) is insurance that protects the lender in the event that you default on your mortgage payments and go into foreclosure. FHA loans require that you pay two types of mortgage insurance premiums – an Upfront Mortgage Insurance Premium (UFMIP) and an Annual Mortgage Insurance Premium (MIP).
Upfront Mortgage Insurance Premium (UFMIP)
The UFMIP is a lump sum that is typically financed into your loan. For example, if your loan amount is $300,000, you would be responsible for paying $4,500 up front ($300,000 x 1.5%). The good news is that you can deduct the UFMIP on your taxes as long as you are eligible to itemize deductions.
Annual Mortgage Insurance Premium (MIP)
The MIP for an FHA loan is similar to PMI for a conventional loan – it’s insurance that protects the lender in case of borrower default. The annual premium is divided into 12 monthly bills and costs between $30 and $80 per month, depending on the size of your down payment, length of your loan, and other factors.
How long do you have to pay PMI on an FHA loan?
The Federal Housing Administration’s mortgage insurance program encourages lenders to make home loans to borrowers with a small down payment—and sometimes no down payment at all.
The FHA reimburses lenders for a portion of their losses if borrowers default on their loans. To cover that risk, the FHA charges borrowers an up-front mortgage insurance premium (MIP) as well as monthly premiums.
MIP is required on all FHA loans, regardless of the loan-to-value (LTV) ratio. Even if you make a down payment of 10%, you’ll still be required to pay MIP.
The amount of MIP you pay depends on several factors, including:
– The size of your down payment
– The term of your loan (the number of years you have to repay it)
– The loan-to-value (LTV) ratio of your loan (the loan amount divided by the value of the property)
You can avoid paying MIP by making a down payment of at least 20% when you get your loan. But most people don’t have that kind of cash available and end up financing their home with an FHA loan.
How can you get rid of PMI on an FHA loan?
You can get rid of PMI on an FHA loan if you meet certain conditions. You must have paid the loan for at least five years, and you must have a good payment history during that time.
You can also get rid of PMI if you refinance your home loan. When you refinance, you take out a new loan with a lower interest rate, and you may also have the opportunity to choose a different loan term. If you choose a loan with a shorter term, you may be able to get rid of PMI sooner.
Conclusion
Based on the mortgage insurance schedule, you’ll pay PMI for at least 5 years unless you make additional payments that bring your equity to 78% or more. After that, the MIP will cancel automatically. If you’re buying a home with an FHA loan and put down less than 10% as a down payment, PMI will be required for the life of the loan.
