When you take out an FHA loan, you pay more than just closing costs. You also pay MIP both upfront and on an annual basis. So what happens when you refinance your loan? Do you get the mortgage insurance premium back?
Unfortunately, you don’t get your mortgage insurance premium back. But, there is good news if you decide to refinance into another FHA loan. This trick only works if you use the FHA streamline program. The streamline loan helps FHA borrowers secure a lower interest rate or change the term of their loan with very little verification.
The FHA MIP Refund
If you refinance using the FHA streamline program, the FHA will provide you with a prorated refund of the MIP you paid. Here’s the trick though – you won’t receive the money in hand. It’s not like the FHA pays you directly. Instead, they give you a credit towards the mortgage insurance premium you owe on your new FHA loan.
Here are the rules:
- You must make six payments on your current FHA loan before you can qualify
- You must refinance your existing FHA loan before the 36th payment
- You must have timely mortgage payments on your current FHA loan in the last 12 months
If you qualify, you can receive between 70% and 10% of the mortgage insurance premium you paid. If your refinance as soon as you are eligible, which is the 6th month you have the FHA loan, you would receive a 70% refund of the mortgage insurance premium. If you wait until you have the loan for 12 months, you would receive 58% back, and if you waited until 30 months, you would get 22% back. Again, the FHA deducts your refund from the new amount you would owe.
Paying Annual MIP
The unfortunate part of taking out another FHA loan is that you will pay MIP for the life of the loan. It doesn’t matter what your LTV is or how much your home appreciated. FHA loans require mortgage insurance for the life of the loan.
The amount you pay depends on the outstanding principal balance. The lender determines how much you owe on an annual basis. They will charge you 1/12th of the full amount each month alongside your mortgage payment. This makes it easier to stay on top of your insurance premiums so that the lender is always protected.
The bottom line is that you will always pay MIP when you have an FHA loan. If you want to get rid of the insurance entirely, you’ll have to refinance into a conventional loan. But it might not make sense to do so until you owe less than 80% of the home’s value. Conventional loans charge PMI in order to protect the lender in the face of default. Conventional loans do cancel the insurance once you owe less than 80% of the home’s value though.
FHA loans have many benefits that make up for the fact that you have to pay mortgage insurance premiums for the life of the loan. Its flexible guidelines are one of the top reasons. You can have mediocre credit and high debt ratios and still qualify for an FHA loan.