Q: I heard that HUD recently changed the rules regarding mortgage insurance (MI) on FHA mortgages. Specifically, I thought I read that you can now drop MI regardless of the loan inception date when you have more than 20 percent equity in your home.
I got an FHA loan in December 1993. I borrowed $79,000 for my home, which cost $80,500. I now owe just over $70,000, but I’m quite sure that I’ve got more than 20 percent in equity due to appreciation. Houses in my neighborhood are selling for nearly $100,000.
My credit is impeccable and has always been. But when I contacted my mortgage company, they told me that I must pay MI for the life of the loan. Is this true?
A: FHA has recently clarified its position on MI, which is like private mortgage insurance (PMI) for FHA loans.
If you bought your home after January 1, 2001, then you are eligible to cancel your MI when you reach 22 percent in equity. If you get there by prepaying your mortgage, or just paying it off, then your lender will automatically drop MI. However, if you’re depending on price appreciation, you’ll most likely have to pay for an appraisal to prove your home’s valuation.
For FHA home loans originated before January 1, 2001, MI cannot be canceled. The only way to get rid of it is to refinance your home loan with a conventional lender.
However, when you sell your home or refinance your loan, you will get small a refund.