June 15, 2017
We’ve been discussing home loans, mortgage insurance, and the differences between FHA home loans and conventional mortgages. One common question that comes up when comparing FHA loans to non-FHA options? “Can you refinance an FHA loan to get rid of PMI?”
The proper answer to this question is that FHA loans do not require PMI, also known as Private Mortgage Insurance. That does not mean the borrower won’t be required to pay for mortgage insurance, but for FHA loans this is an expense factored into the mortgage payment as part of the loan transaction.
The borrower is required to make an FHA Up Front Mortgage Insurance Premium payment as part of closing costs (it can be financed into the loan if the borrower chooses) and make a monthly mortgage insurance payment called MIP.
Those who want to refinance conventional mortgages into FHA loans will no longer need Private Mortgage Insurance (PMI) but will instead pay MIP.
Where FHA mortgage insurance premiums are concerned, most FHA loans issued today (with certain exceptions your lender can explain) including FHA Cash-out Refinancing and FHA-to-FHA Streamline Refinancing loans will require MIP for either the duration of the loan or for 11 years, depending on the LTV, base loan amount and other factors.
Borrowers who refinance FHA-to-FHA may wonder if they are due a refund on their Up Front Mortgage Insurance Premium. According to the FHA Loan Handbook, HUD 4000.1, “The UFMIP is not refundable, except in connection with the refinancing to a new FHA-insured Mortgage” but only within a certain time limit.
“If the Borrower is refinancing their current FHA-insured Mortgage to another FHA- insured Mortgage within 3 years, a refund credit is applied to reduce the amount of the Upfront Mortgage Insurance Premium (UFMIP) paid on the refinanced Mortgage, according to the refund schedule…”
Your lender can explain the refund schedule to you and see whether your refinance loan transaction qualifies for a refund of UFMIP.
Bottom line: most FHA borrowers will pay some form of mortgage insurance, though not in the same way as a conventional borrower who must use private mortgage insurance or PMI. Refinancing a conventional mortgage eliminates the need for PMI, but does not eliminate the need for the FHA-required mortgage insurance premium (MIP), which is paid on today’s FHA loans for either 11 years or the duration of the mortgage term depending on LTV, term of the loan, base loan amount, etc.
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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