Mar152015

How to eliminate expensive FHA insurance fees

FHA mortgage insurance is expensive, and it’s difficult to get rid of.

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We are at record low interest rates, so in all likelihood, mortgage rates will go higher from here. Although it may be possible to refinance later to eliminate the insurance premium, it may not be advantageous if refinancing carries a much higher interest rate. It’s very possible some of these borrowers may be paying that onerous FHA insurance premium for a very long time.

Ditching FHA mortgage insurance no easy task

By JEFF LAZERSON, March 12, 2015

If you have a Federal Housing Administration loan and are itching to extricate yourself from the FHA mortgage insurance, there are many forks in the road you can take. You just have to understand the available options, do some simple math and make a decision.

First of all, the Orange County median property value has increased more than 35 percent from January 2011 through January 2015, according to CoreLogic DataQuick.

If you have a fantastically low interest rate, have 22 percent equity and you’ve been paying on-time for two years, you might think you can simply call your servicing lender, right? Get an appraisal to prove the equity. Ditch the mortgage insurance. Game over!

Forget it. That’s not how it works when it comes to FHA.

If your loan case number predates June 3, 2013, you not only need to have 22 percent equity in your home (a loan-to-value of 78 percent), you also need to have lived there for five years, said U.S. Department of Housing and Urban Development spokesman Brian Sullivan.

According to Sullivan, the 78 percent loan-to-value is based upon the original loan amount, not the original sales price or the original appraisal (in the case of a conventional loan refinanced into FHA). And, if you did any streamlined refinance loan or any subsequent FHA loan, that 78 percent loan-to-value and five-year clock starts again based upon the new loan amount and the fact that you were issued a new FHA case number.

For any FHA case number issued on June 3, 2013, or thereafter, and you’ve put less than 10 percent down, you are in FHA purgatory. The mortgage insurance stays on for the life of the loan.

In that case, think hard about refinancing out of FHA when current rates and timing are right.

If you have at least 10.1 percent equity, you can shed the mortgage insurance using a financial instrument called a piggy-back loan. Your first trust deed is 80 percent loan-to-value or less and the remainder is put on a small second (hence, the name piggy-back).

If your household income is $110,000 or more per year, mortgage insurance is not tax deductible. Certainly, here is another reason to get rid of mortgage insurance.

You can refinance into a conventional loan if you have at least 20 percent equity.

The critical question is what your current rate and payment is compared to what you can get by waiting for the five-year, 78 percent window to open. Or, alternatively, what the numbers look like for a new loan.

FHA recently began offering a streamlined refinance process with reduced annual mortgage insurance premiums for new loans. These loans require virtually no qualifying or an appraisal, so long as you are paying timely and you are reducing your payment by at least 5 percent.

Jeff Lazerson can be reached at [email protected]

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