FHA MIP Release option “disappearing”

Recently, I posted an article illustrating how releasing the mortgage insurance premium (MIP) on an existing FHA loan — after at least 60 monthly payments, and reaching a loan-to-value (LTV) ratio of 78% or lower — could substantially lower the borrower’s monthly payment, making more cash available for principle reduction. In sweeping reforms designed to shore up the financially ailing Federal Housing Administration, on loans originated after April 1, 2013, this option will not be available — meaning that, regardless of the equity the borrower has in the property, he will pay a monthly mortgage insurance premium for the life of the loan. In the future, the only way to eliminate the MIP will be to refinance the loan using a conventional lender. Of course, if interest rates rise as we all expect they will over the next few years, refinancing will not be a cost-saving option.

To add “insult to injury,” on loans originated after April 1 this year, the rate charged for MIP will increase substantially. On a $400,000 loan with certain LTV ratios would pay an additional $33.00 per month in MIP premium.

What should you do?

If you planned to make a purchase this year using an FHA loan (as the majority of today’s homebuyers do), consider escalating your time-line. You will need to have an accepted offer to purchase (i.e., your new home under contract), and make application with your lender before April 1, 2013. Because these changes are significant, I look for there to be a “rush” on lenders near the end of March, overwhelming them with the number of applications — so for best service, don’t want until the last minute!

Call me with any questions! I have a list of recommended lenders who can handle almost any situation, and although our available inventory is shrinking, we still have a number of great homes available at fantastic prices.

FHA MIP Release

FHA loans require mortgage insurance premium to cover a possible loss to the lender if the property has to be foreclosed and sold. The premium is substantial and eliminating the MIP would reduce the monthly payment considerably.

The MIP must remain in effect for five years but after that, when the balance is 78% of the original purchase price, FHA will release the requirement and your monthly payment will go down. Since amortization is affected by interest rates, the normal time to reach this 78% point could be from 9 to 12 years at today’s interest rates.

In the example below, the MIP would be released in 9 years 6 months with normal payments. An extra $100 a month would allow the borrower to reach the release point in 7 years 1 month. To reach the release point in the minimum five years, the borrower would have to make an extra $268.04 per month principal contribution.

Releasing the MIP in this example would save the borrower $177.67 per month. The borrower would also save interest, build equity and shorten the term of their mortgage. Once the MIP is released, the borrower could continue the same payment schedule to further accelerate the debt reduction.

To make some projections on your mortgage, click here.

** See author’s 2/25/2013 update on changes to FHA financing