Refinancing may allow an eligible Denver homeowner to stop paying FHA mortgage insurance by replacing the FHA loan with a conventional mortgage that does not require private mortgage insurance. Whether this strategy works depends on available equity, credit, income, interest rates and refinancing costs.
FHA mortgage insurance is normally called a mortgage insurance premium, or MIP. Its cancellation rules differ from those governing PMI on conventional loans.
Does FHA Mortgage Insurance End Automatically?
The answer depends partly on when the FHA case number was assigned and the original loan terms.
HUD states that monthly premium cancellation remains available for certain older FHA mortgages with case numbers assigned before June 3, 2013, provided they meet the applicable requirements. Many newer FHA mortgages have different MIP durations. Depending on the original loan-to-value ratio, MIP may continue for a specified number of years or for the life of the mortgage.
Homeowners should contact their servicers with the FHA case number and ask for the precise MIP termination rules applying to their loans. HUD mortgage insurance information
How Can a Conventional Refinance Stop MIP?
A conventional refinance pays off the FHA mortgage and replaces it with a new conventional home loan. Because the FHA loan no longer exists, its monthly MIP ends.
The new conventional mortgage may not require PMI when the homeowner has sufficient equity and satisfies the lender’s requirements. If the new loan exceeds the lender’s applicable loan-to-value threshold, conventional PMI may still be necessary.
Refinancing an FHA mortgage does not automatically guarantee a lower payment. The new interest rate, loan amount and repayment period will determine the result.
What Will the Lender Evaluate?
Qualification requirements generally include:
- Credit score and payment history
- Employment and qualifying income
- Debt-to-income ratio
- Current property value
- Existing mortgage balance
- Property type and occupancy
- Available funds for closing
An appraisal may be required to determine whether the Denver property has enough equity to avoid conventional mortgage insurance.
What Refinance Expenses Should You Compare?
Common refinancing expenses include:
- Origination charges
- Appraisal fees
- Title-related expenses
- Recording charges
- Credit-report fees
- Discount points
- Prepaid taxes and insurance
Some costs may be incorporated into the new mortgage. This reduces the amount due at closing but increases the loan balance and the interest paid over time.
- Calculate the Break-Even Point
Divide the total refinance costs by the estimated monthly savings to calculate a basic break-even period. If refinancing costs $6,000 and reduces the payment by $200 per month, the simple break-even point would be approximately 30 months.
This calculation should include more than mortgage insurance savings. Compare the new principal-and-interest payment, remaining loan term, closing costs and total projected interest.
Refinancing may help stop FHA mortgage insurance on a Denver home, but eliminating MIP is only beneficial when the complete new loan offers a meaningful financial advantage.
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