When Can I Eliminate Mortgage Insurance?
Pre-paying your mortgage can save thousands in interest and build equity in your home. As cheap as mortgage rates are currently, they’re higher than you can earn on your savings. If you don’t need the money any time soon, pre-paying the mortgage can be the better investment.
If you have a FHA loan, pre-paying the mortgage can also benefit you by eliminating the annual mortgage insurance premium early. For example, if a person bought a home for $175,000 with a 3.5% down payment on a 4% FHA loan, the monthly mortgage insurance would be $178.99.
It would take 116 months or over 9.5 years to reduce the principal enough to cancel the MIP. If the borrower would make additional principal contributions of $285.32 per month, the MIP would not be required after five years. Beginning June 3, 2013, mortgage insurance on FHA loans will be required for the life of the mortgage.
The elimination of MIP would lower payments or a buyer could continue making the higher payments to reduce the principal and retire the loan sooner.
FHA mortgages with terms longer than 15 years, the MIP can be cancelled when the loan-to-value reaches 78% after a minimum of five years. With normal amortization, that would take about 10-12 years.
Another alternative to eliminate the MIP is to refinance the home with a conventional loan. If the loan-to-value is less than 80%, the MIP would no longer be required and a lower interest rate may be available.
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