I have an FHA mortgage that was taken out in 2011 and my loan-to-value (LTV) ratio is now approximately 75 percent.
My FHA loan requires me to pay the monthly mortgage insurance premium (MIP) for a minimum of five years despite the fact that I am below the 78 percent LTV threshold needed to cancel the premium. Recently, I have considered taking out a home equity line of credit (HELOC) for home improvements, but I’m not sure if this new mortgage will impact the LTV and jeopardize the cancellation of MIP at the five-year mark. Any idea how this might work? I have about 11 months remaining before I get to the five-year mark.
My sincere thanks for any advice you can offer.
FHA loan policy regarding mortgage insurance premiums have changed several times over the past few years. Depending on when you got your loan, you either were required to pay MIP for the entire length of the loan (with no possibility of cancellation, no matter how much equity you built) or until you reached a certain level of equity (22 percent) combined with paying on the loan for a fixed period of time, in your case five years. In addition, the upfront fees have risen and fallen over the years.
Since you have already reached the 78 percent threshold (and in fact have 25 percent equity in your home), we’re wondering why you haven’t refinanced with a conventional lender to get rid of your mortgage insurance premium. You may be able to refinance to a shorter term loan with a lower interest rate and save fees along the way.
You should investigate the possibility immediately, now that mortgage rates have fallen over the past few weeks (you can thank collapsing oil prices for this latest downturn in mortgage rates). If you can switch from a 30-year loan to a 15-year loan without a private mortgage insurance, for about the same money each month, you’ll build equity very quickly.
As far as taking out a home equity line of credit, lenders will generally allow you to borrow up to the 80 percent threshold, which doesn’t give you much room (just 5 percent of the value of your home). Sometimes they will allow you to go to 85 percent, but you’ll pay more in interest rates and fees.
If you can refinance your home now, you’ll save 10 months’ worth of mortgage insurance premium payments, which may be significant and could pay for most or all of the refinance. If you’re also able to shorten your loan term, your refinance will be a home run. You may also have the ability to talk to a lender about taking out a new primary fixed rate loan and, perhaps, a second home equity line of credit.
If you can delay tapping into your home equity until after you refinance, that will be the best move. Even so, you won’t be able to borrow so much of your home equity that it should cause a problem with the FHA. But by talking to a mortgage lender or mortgage broker you’ll be able to gauge your options and see the one that works best for you. Keep in mind that equity line of credit interest rates may be higher than the fixed rate you have now and may get on a new loan. The interest rate on the equity line may also be variable, so be careful when choosing your loan products and plan for worst case scenarios when you do.
Glink is the creator of an 18-part webinar+ebook series called “The Intentional Investor: How to be wildly successful in real estate,” as well as the author of many books on real estate. She also hosts the “Real Estate Minute,” on her YouTube channel. Tamkin is a Chicago-based real estate attorney. Contact Ilyce and Sam through her website, ThinkGlink.com.
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