Can a new appraisal get rid of FHA mortgage insurance (MIP)?

Your MIP was decided the day you closed

This question usually shows up right after an FHA homeowner sees what the house down the street sold for. The answer is not the one they want.

HUD changed the rules in Mortgagee Letter 2013-04. For FHA case numbers assigned on or after June 3, 2013, the length of your annual mortgage insurance premium (MIP) depends on your loan-to-value ratio at origination. Loan-to-value, or LTV, is the loan amount divided by the value.

• LTV of 90% or less at origination: annual MIP for 11 years or the loan term, whichever comes first.
• LTV over 90% at origination: annual MIP for the full loan term. HUD's letter describes that as up to 30 years.

Most FHA buyers put down the minimum, so most FHA borrowers fall in that second group. In plain words: the MIP is in it for the long haul, like a houseguest who brought a moving truck.

Why a higher appraisal doesn't change it

Your home may be worth a lot more now. A fresh appraisal might even prove it. FHA's MIP rule doesn't look at that number.

Before the 2013 change, FHA had a rule that canceled annual MIP automatically when the loan reached a certain loan-to-value, around 78%. Mortgagee Letter 2013-04 rescinded that automatic cancellation for new case numbers. That's why advice from your parents' FHA loan may not apply to yours.

Paying down principal doesn't end it early either, unless you're in the 11-year group and simply reach year 11. Extra payments still save interest. They just don't fire the mortgage insurance.

This catches people because conventional loans work differently. On a conventional loan, private mortgage insurance (PMI) can often be removed as you build equity, and an appraisal can play a part in that. FHA's MIP isn't PMI, and the two follow different rules.

The usual way out: refinance into a conventional loan

If you want MIP gone and you have built equity, the common path is to refinance from FHA into a conventional loan. The new loan has its own loan-to-value, based on the new value.

That new value comes from one of two places:

• A new appraisal, ordered by the new lender.
• Value acceptance (Fannie Mae's appraisal waiver), if the system offers it. For a limited cash-out refinance on a primary home, Fannie Mae allows value acceptance up to 90% loan-to-value.

Fannie Mae requires mortgage insurance on a conventional first mortgage with an LTV over 80%, unless another approved credit enhancement is in place. So the real question isn't "can I get rid of MIP?" It's "does my house appraise high enough that the new loan is 80% or less?"

That is where a good value read matters. If you guess high and the appraisal comes in lower, you may end up with a new loan that still carries mortgage insurance, plus closing costs, plus a new rate.

Do the math before you pay for an appraisal

A refinance is not free. Before you start, line up these numbers:

1. Your current loan balance. It's on your statement.
2. Your origination LTV. Check your closing papers. If it was 90% or less and your case number is from June 3, 2013 or later, your MIP may drop off at 11 years anyway.
3. A realistic value. Closed sales of similar homes nearby in the last few months. Not the listing down the street. Not the online estimate.
4. The new loan-to-value. Divide your balance (plus any cash out and financed costs) by that realistic value.
5. Today's rate versus yours. Dropping MIP but taking a much higher rate can cost more each month than the MIP did.
6. Closing costs. Add them up and figure how many months of savings it takes to break even.

Ask your loan officer to run both versions side by side. Facts over feelings. The feeling of "no more MIP!" can be expensive if the math says otherwise.

What I see when homeowners try this

From the appraiser's chair, the refinances that work are the ones where the owner had a grounded idea of value before they applied. The ones that disappoint started with a number from an app, or from a single neighbor's sale that had a remodeled kitchen and a view the owner's house doesn't have.

A conventional refinance appraisal measures the market. It looks at similar homes, adjusts for real differences the market pays for, and lands on a value. Condition matters a lot here. In the markets I work, buyers react to condition more than age, so a house with tired finishes may not hit the number the owner expected, even in a strong market.

If you want to know where you stand before you pay for a loan application, a private appraisal or consultation can give you an evidence-based read. It won't be the lender's appraisal, but it can tell you whether 80% loan-to-value is realistic or wishful thinking.

Tax, legal and loan program details can change. Your loan officer is the right person to confirm the current rules for your exact loan.