Canceling FHA Mortgage Insurance

Mortgage insurance, whether it is private mortgage insurance or FHA mortgage insurance, adds to your monthly payment. The borrower pays it, but it is there for the lender’s benefit, and it adds nothing to your equity. Nonetheless, the presence of mortgage insurance makes it possible for more people to buy homes. Most homeowners look forward to being able to cancel this premium and put the money to other uses, or apply it towards principal.

The mortgage insurance contract, although it is paid for by the borrower, is a contract between the lender and the FHA, and it is up to the lender to set policies about when the borrower is allowed to drop the insurance. Typically, a borrower must have a good payment record, and must have built up 20 percent equity in the home before it can be dropped.

The mortgage insurance is automatically dropped when the balance due is 78 percent of the initial sales price, or apprised value, whichever is lower; in other words, when the loan-to-value ratio reaches 78 percent. The one-time mortgage insurance premium that was paid up front is not used in calculating the 78 percent value. FHA provides lenders with an ending date for the mortgage insurance premiums. If a borrower has made prepayments, and the 78 percent LTV has been achieved before that date, the borrower may request that the premiums be cancelled.

If a borrower has the ability to make a down payment of ten percent or more, and chooses a 15-year term for the mortgage, only the initial up-front premium has to be paid, and no monthly premium payments will be due. In some circumstances, such as when purchasing a condominium, the upfront premium is not charged, but the monthly premium will be due for the entire lifetime of the mortgage.