Have you bought a home with an FHA loan recently? If so, you probably remember the FHA’s upfront mortgage insurance premium (MIP). Paying this fee helped you qualify for this popular homebuying program.
But fewer borrowers know the FHA will refund part of this 1.75% upfront mortgage insurance premium — if you refinance into another FHA loan within three years.
Your refund will reduce the upfront premium due on your FHA refinance, lowering the cost of the new loan.
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Who can get a refund on FHA MIP?
FHA borrowers who closed their current loans within the past three years can get part of their upfront mortgage insurance premium applied to a new FHA refinance loan.
Upfront MIP is a significant expense — 1.75% of your loan amount. If you borrowed $325,000 a year ago, for example, you would have paid $5,688 in upfront FHA MIP.
Now, a year later, let’s say you’re ready to refinance into a new FHA loan to take advantage of lower interest rates. You could get 58% of your current loan’s MIP — or $3,299 — back to use toward your new FHA upfront premium.
It’s important to note that the FHA MIP refund does not come in the form of cash back, and it is only applicable if you’re taking out a new FHA loan. You’re not eligible for a refund if refinancing into a conventional loan.
“FHA MIP refunds only apply to FHA to FHA refinance transactions,” says Jeff Satre, a branch manager with Fairway Independent Mortgage Corporation in Ashburn, Va. (Fairway owns Home.com). “You do not get a cash refund by paying off your loan within the first five years. That is an older policy of FHA that no longer exists.”
The size of your FHA MIP refund will decrease as time passes. This FHA MIP refund chart shows how your refund grows smaller with each passing month.
FHA MIP refund chart
If it’s been more than 36 months since your current FHA loan closed, you’d need to pay the full 1.75% upfront MIP on your FHA refinance loan.
To be eligible for a refund of the upfront mortgage insurance you paid on your current FHA loan, you’ll need:
- To maintain payments: If you’ve missed payments on your current loan, you won’t qualify for the refund
- A recent loan: A loan that’s more than three years old won’t qualify for a MIP refund
- A new FHA refinance: The refund process works only when you’re doing an FHA-to-FHA refinance. Replacing your current FHA loan with a conventional loan won’t qualify you for a refund
Ask your loan officer to check if you’re not sure whether your MIP refund will be applied to your new FHA loan.
The Federal Housing Administration uses the term “refund” to describe the process of reusing part of your current loan’s MIP on a new loan. But you won’t receive cash back from your lender.
Instead, you’ll get something more like “store credit” applied toward your next FHA loan’s upfront MIP.
“You will not receive a full refund of the FHA MIP,” says Joe Pessolano, a branch sales manager with Fairway in Garner, N.C. “It is a pro-rated refund and can only be refunded within a few years after getting the original loan.”
While you won’t see the refunded cash change hands, you can see its effects in the form of lower borrowing costs when you sit down to close on your FHA refinance.
To see how this refund could help you, let’s go back to the example of a $325,000 FHA loan taken out 12 months ago. That loan would’ve required an upfront mortgage insurance premium of $5,688 (1.75% of $325,000).
Now it’s been 12 months since you closed on the loan, and you’ve made 12 consecutive, on-time mortgage payments. Your mortgage balance is now $318,000, which is how much you’ll be refinancing.
A check of the FHA MIP refund chart above shows you’d be eligible for a 58% refund, which equals $3,299 (58% of $5,688). This refund amount of $3,299 would be deducted from your new loan’s upfront MIP.
Ordinarily, a full upfront MIP of 1.75% would add $5,565 to your refinance loan. But when your lender applies your $3,299 MIP refund from your current loan, you’d add only $2,266 to your new loan’s balance ($5,565 – $3,299).
FHA MIP refund example
|MIP on new FHA refinance||$5,565|
|MIP Refund from current FHA loan||$3,299|
|Reduced upfront MIP owed on new refi||$2,266|
This lower upfront FHA MIP means lower closing costs if you plan to pay the premium out of pocket. Or, if you plan to roll the fee into your loan amount like most borrowers, the refund means less principal and less interest owed over the life of the loan.
Modern FHA loans require two types of mortgage insurance premium (MIP):
- Upfront MIP: This is the 1.75%, one-time fee you could get partially refunded if you refinance into another FHA loan within three years
- Annual MIP: The FHA charges this fee each year, and it ranges from 0.45% to 1.05% of your loan’s balance depending on your loan term and original size
You’ll keep paying annual MIP throughout the life of your FHA loan unless you paid 10% or more as a down payment. In that case, your annual MIP will stop after 11 years.
The FHA’s minimum down payment amount is 3.5%, and many borrowers opt to put down less than 10%. That means they cannot eliminate MIP — unless they refinance out of the FHA program altogether.
Getting a conventional loan can eliminate mortgage insurance once you’ve paid down at least 20% of the loan, as conventional mortgages do not have a private mortgage insurance (PMI) requirement if you have at least 20% equity in the home.
FAQs about the FHA MIP refund chart
The size of your FHA MIP refund depends on the age of your current FHA loan. As each month passes, you’re eligible for a smaller refund. Your refund will be applied to the upfront MIP on your new FHA loan, whether it’s an FHA Streamline or an FHA cash-out refinance.
Based on current FHA rules, annual MIP lasts the life of the loan unless you put 10% or more down, in which case it expires after 11 years. You can remove MIP by refinancing to a conventional loan once you have at least 20% equity in the home.
Since it’s charged as a percentage of your loan’s size, annual FHA MIP decreases each year along with your loan balance. Upfront MIP is a one-time fee that could be partially refunded and used on a FHA refinance loan within three years. The refund’s size decreases over time.
Paying the FHA’s mortgage insurance may seem like an annoying added expense, but MIP has an important job: It helps lenders offer competitive loans to those who may not qualify for conventional financing.
Upfront MIP goes even farther when you can re-use it for an FHA refinance. You could spend less upfront on a refinance to lower your monthly mortgage payment or save long-term on interest.
Fairway is not affiliated with any government agencies. These materials are not from VA, HUD or FHA, and were not approved by VA, HUD or FHA, or any other government agency.
Some references sourced within this article have not been prepared by Fairway and are distributed for educational purposes only. The information is not guaranteed to be accurate and may not entirely represent the opinions of Fairway.