What is the impact of the new Federal Housing Administration mortgage insurance cancellation policy?
For more than a decade, the FHA has said that borrowers could generally cancel their monthly mortgage insurance premium (MIP) after five years if the "unpaid principal balance, excluding the upfront MIP, reaches 78 percent of the lower of the initial sales price or appraised value based on the initial amortization schedule."
In other words, the MIP was locked in for five years even if you vigorously prepaid your mortgage and made your payments on time. If you relied just on regular monthly payments it would take almost a decade to reduce the debt to 78 percent of the original mortgage amount.
The revised FHA policy – which starts for new loans originated after June 3, 2013 – uses a different approach.
First, if you borrow with less than 10 percent down, the MIP will remain in effect for the life of the loan.
Second, if you borrow with more than 10 percent down, the monthly MIP payments continue for the first 11 years of the loan term.
Why the change?
The Department of Housing and Urban Development argues that the new approach is necessary. The FHA remains responsible for paying off the loan during its entire term, therefore the MIP should not be canceled early when borrowers put down less than 10 percent.
It’s a matter of money: "FHA remains responsible for insuring 100 percent of the outstanding loan balance throughout the entire life of the loan, a term which often extends far beyond the cessation of these MIP payments,” according to an HUD press release. The FHA has found that its Mutual Mortgage Insurance fund “has foregone billions of dollars in premium revenue on mortgages endorsed from 2010 through 2012 because of this automatic cancellation policy.”
If you've had your FHA loan for a while, contact your servicer to see if you qualify for an MIP cancellation. For some borrowers, the answer may be a pleasant surprise.
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