Clay Edmonds – MortgageSimplified.net

The headlines this week have been loud: a bipartisan group of lawmakers has reintroduced the Mortgage Insurance Freedom Act. If passed, it would allow FHA borrowers to cancel their mortgage insurance premiums (MIPs) once their loan-to-value (LTV) ratio reaches 78%—mirroring how Conventional Private Mortgage Insurance (PMI) works.

On the surface, this sounds like a win. It puts FHA borrowers on a level playing field with Conventional borrowers.

But as mortgage strategists, we have to look past the headline and look at the amortization schedule. When you run the math, the reality is that most FHA borrowers will never see the benefit of this bill, even if it passes.

The “Safety Net” Reality: Why FHA Fees Exist

Before we criticize the fees, we have to acknowledge why they exist. FHA isn’t just charging fees for profit; they charge them to fund the Mutual Mortgage Insurance Fund (MMIF).

This fund is what allows FHA to offer competitive interest rates to borrowers with 580 credit scores.

• The 700+ Credit Borrower: Usually chooses Conventional because their PMI is cheap, and there is no upfront mortgage insurance fee.
• The Sub-700 Credit Borrower: Needs FHA because Conventional pricing penalizes them with high rates and expensive PMI. FHA offers them a lifeline with a lower rate, subsidized by these insurance premiums.

We don’t want to bankrupt the fund—that would kill the program. But there is a better way to help affordability without breaking the bank.

Why Cancellation Sounds Bigger Than It Is

The bill proposes that once you hit 78% LTV, MIP drops off.

Here is the math problem: On a 30-year loan with a minimum FHA down payment (3.5%), it typically takes 9 to 11 years to naturally reach 78% LTV.

However, the average FHA borrower refinances or sells in 5 to 7 years. Most borrowers leave the loan long before this new law would ever help them.

The Real Solution: Lower the Upfront Fee (And Stop Financing It!)

Policymakers already lowered the monthly MIP in 2023 (from 0.85% to 0.55%). Now, they need to attack the Upfront Mortgage Insurance Premium (UFMIP), which currently sits at 1.75%.

On a $400,000 loan, that is $7,000 added to the loan balance on Day 1. Because it is so expensive, almost every borrower finances it into the loan—meaning they pay interest on that fee for 30 years.

Our Proposal: The “Seller-Paid” Strategy

If Congress lowered the UFMIP to 1.00% or 0.50%, a new strategy opens up: Paying it at closing instead of financing it.

1. Leverage Seller Credits: FHA allows sellers to contribute up to 6% of the sales price toward closing costs.
2. The Payoff: If the fee is manageable (say, $2,000 instead of $7,000), a smart Realtor can negotiate for the seller to pay this fee via credits.
3. The Result: The borrower doesn’t add the fee to their loan balance. Their monthly payment is lower because they are financing less principal.

This turns “dead money” into immediate equity and monthly savings.

Feature	Mortgage Insurance Freedom Act (The Bill)	Reducing UFMIP + Seller Pay Strategy
When it helps	Year 10 or 11 (approx.)	Day 1 (Closing & Monthly)
Who it helps	Only those who keep the loan for a decade	Every Buyer (especially in this market)
Impact	Removing MIP eventually	Lower Loan Balance & Payment
Reality	Most refinance before this kicks in	Immediate affordability boost

The Bottom Line

We applaud the intent of the Mortgage Insurance Freedom Act. It is logical to align FHA with Conventional rules. However, this is currently just a bill, not a law, and the “Life of Loan” rule still applies for now.

If policymakers truly want to help the borrowers who need it most, the focus should be on reducing the Upfront Premium.

If we can get that fee down, we can stop tacking it onto the loan balance and start using seller concessions to pay it off upfront. That is how you create real, lasting affordability.

At MortgageSimplified.net, our job is to cut through the political noise and give you the full financial picture. We track these bills so you don’t have to.