When homeowners take out loans backed by the Federal Housing Administration (FHA) then they need to pay mortgage insurance premium (MIP).
Along with allowable mortgage interest, mortgage insurance premiums were deductible until the 2017 Tax Cut and Jobs Act.
But tax deductions for MIP and private mortgage insurance (PMI) for 2020 and retroactively for 2018 and 2019 are allowed by the Further Consolidated Appropriations Act of 2020.
MIP is used by FHA-backed lenders to protect themselves against higher-risk borrowers who are more likely to default on loans.
Every borrower is required to have mortgage insurance when they take FHA mortgages.
Defaulting is a key concern with the FHA loans because they come with a down payment as low as 3.5% and also a credit score which is as low as 580, hence mortgage insurance premiums (MIP) is used as a tool to protect themselves against higher-risk borrowers by the FHA-backed lenders.
In a conventional loan if the down payment amount is less than 20% of the property’s purchase price only then a borrower needs private mortgage insurance (PMI) policies but with FHA mortgages, every borrower is needed to have mortgage insurance.
An upfront premium of 1.75% of the total loan amount and an annual premium of 0.45% to 1.05% is required for each FHA loan.
The upfront premium payment is at the loan issuance. From the term of the loan, the amount borrowed, and loan to value ratio you would be able to determine the exact yearly cost.
The loan’s payment amount will reflect the annual premium divided by 12 months along with the principal payment each month. escrow amounts for property taxes and homeowner’s insurance coverage are the other charges that are usually included in the monthly fee.
The buyer may cancel the PMI once they pay 20% of the loan’s value or after the loan is 11 years old if they are using a conventional loan.
But this reduction is not possible with the FHA. The origination date of the loan is what it is dependent on.
Even if you qualify for a conventional loan and need to pay private mortgage insurance, you as a borrower should look at FHA loans to determine which is the better deal.
If you have a low credit score and can make a 10% down payment, it is better you opt for an FHA mortgage.
Sometimes few lenders may also provide a separate loan to cover the down payment amount.
It is beneficial if you talk to your tax accountant, financial advisor, and your bank to see which loan makes the most sense for your situation.
Your lender will send Form 1098 Mortgage Interest Statement to you and the Internal Revenue Service (IRS) every year.
Your mortgage payments over the past year are listed in this form and can affect your income tax. Box 5 of the form will have the total amount of the MIP or PMI premiums.
You must itemize your deductions using Schedule A under the interest paid section to claim a deduction for either type of mortgage insurance.
With the passage of the Tax Cuts and Jobs Act of 2017 the deduction for these premiums expired on Dec. 31, 2017.
But the deduction was passed by the Further Consolidated Appropriations Act, 2020, and was extended by Congress to Dec. 31, 2020.
This means that the deduction was available for the 2019 and 2020 tax years, and retroactively for 2018 taxes.
The advantage of the deduction for qualified mortgage insurance premiums (MIP) cannot be taken by everyone.
Your qualification depends on your filing status and adjusted gross income (AGI).
For every step over the allowable borrower’s AGI limit, the deduction reduces by 10%. For those earning over $54,500, or $109,000 for joint filers it completely disappears.
All FHA government-backed loans have MIP attached to it. FHA loans that have low down payments, as low as 3.5% in some cases have MIP associated.
It usually lasts for 11 years or the life of the loan unless you refinance into another mortgage program once you reach a 20% equity.
With so many companies to choose from and hundreds of loan options, the mortgage process can be confusing and costly.
When it comes to the FHA program it is one of the most widely used mortgage loan programs out there.
Especially for first time home buyers where they can make a minimum down payment of 3.5%.
However, making less down payment would add something called private mortgage insurance or PMI for FHA loans. In this post, we will learn tips for FHA loans PMI removal.
Many people are still confused or unaware of private mortgage insurance (PMI) on FHA loans. PMI is applicable to FHA loans where you have less than 20% of the equity in your home.
For example, if you are buying a house worth $100,00 and you are making a down payment of $20,000 and getting a loan for $80,000, that means you are putting your share of $20,000 in your house, meaning you have 20% equity in your house.
The PMI protects the lender if you stop making payments on your loan. There are two versions of PMI. In the case of FHA loans, no matter what amount of down payment you are putting, you will get PMI.
PMI is directly proportionate to your down payment As FHA requires a minimum of 3.5% and you put 3.5% as a down payment, you are going to have PMI as long as you have that mortgage.
The only way for FHA loans PMI removal is through refinancing and it doesn’t mean that you have to jump into refinancing.
Before you refinance into a conventional loan program to remove the PMI, you have to make sure you look at these important things.
1) Increase your Credit Score: If you got the FHA loan because of your low credit, then you need to work towards increasing your credit score to be able to qualify for the conventional mortgage refinance.
Usually, the credit score required for the conventional loan is 640 or above. However, that depends on the lender you are working with.
Once you have your credit score more than the required range, you can now refinance into a conventional mortgage and remove the PMI for an FHA loan.
2) Build Equity: If you got an FHA loan because of a low down payment, you have to be sure that your equity in the house is more than 20% of your property value before you refinance into a conventional loan.
Or your property value should be appreciated enough to cover your share of equity for up to 20%. If that is one of the ways for FHA loans PMI removal.
3) Go for Conventional With PMI: Even if you don’t have enough down payment, you could still go for a conventional loan with a minimum of 3% down payment and PMI.
The difference between the FHA loan PMI and the Conventional loan PMI is that FHA loan PMI remains till the life of the loan or till the time you refinance into any other program, however, the conventional loan PMI can be removed once you have the 20% equity in your house provided you gave a good credit score.
So for FHA loans PMI removal, you need to have, one, 20% equity in your property and, two, you need to refinance into a conventional loan.
Many people assume that they are at a great FHA rate, however, what they don’t understand is that they are also paying an additional 5 to 8 percent more in form of a PMI which they can avoid if they opt for a conventional loan.
When people are asking for an idea for their monthly payment or when they are online getting ideas, they always get a sense of what their payments are going to be.
You initially think that your payment is going to be nice and low only to realize that it is going to be a few hundred dollars more than you thought it was.
In this post, we will know more about private mortgage insurance and how you can get rid of it.
Mortgage insurance has a long history in the lending market and with the government. Mortgage insurance started out after the Great Depression, as a way to encourage banks to continue to loan out money because they were hardest hit when people default.
With bad economic times, banks tend to lose lots of money, so mortgage insurance was created to encourage them to start loaning out again.
Essentially, it is a way for the banks to protect themselves from people to take mortgages, and in case if they default on their mortgage, the bank will get a large percentage of the amount back.
However, If you are paying it in cash, you don’t get the mortgage insurance.
If you are getting an FHA loan, you are going to have mortgage insurance for the entire tenure of the loan.
In FHA loans, the minimum down payment is 3.5%, and if you do 3.5%, you are going to finance with an upfront mortgage insurance premium.
This could be paid upfront too if you want to. However, most people would finance it into their home loan, and that percentage is 1.75% of the loan amount, which is amortized over the life of the loan.
You can always put 5% or more down on your house, and this will drop the mortgage insurance to 0.8% of the loan amount.
And if you make 10 % on your down payment, you can clear your mortgage insurance in 15 years on a 30-year loan.
FHA loans are good options compared to conventional loans as the interest rates are comparatively lower, which makes the monthly payments more affordable, especially for people who have low to fair Fico scores.
With Conventional loans, if you have a great portfolio with good credit and job history, the loan officer can shop around for your private mortgage insurance (PMI) and possibly get you a better number.
There are multiple ways of constructing your private mortgage insurance (PMI) premiums on a conventional loan.
You can buy private mortgage insurance upfront, which is a great option, especially if you have an excellent credit score because frequently that will give you the lowest monthly payments.
You also get an option in conventional loans where you can pay a portion of private mortgage insurance (PMI) upfront and remain in your monthly payments.
The other option you can get is to pay the entire private mortgage insurance (PMI) with your monthly payments. The best way to get rid of private mortgage insurance (PMI) is by making a principal reduction payment.
Paying the home loan down up until you get the 20% equity. Once you reach 20% equity, you will have to call your lender and request that your private mortgage insurance (PMI) gets removed.
VA loans don’t have any monthly premiums; they do have what is called a VA funding fee. This fee goes into a pot of funds that guarantees all VA loans.
You don’t have to pay VA funding fee if you are a disabled veteran at more than 10%. The premiums may vary depending on the military branch that you were in and if you have taken it out more than once.
No matter which loan you go for, it is always best to get multiple scenarios presented to you, because most people think that getting the lowest interest will have the most significant impact on your monthly payments.
You might want to talk to your trusted loan officer about how they structure mortgage insurance that will benefit you in the long run.