Mortgage Insurance Premium is a cost associated with an FHA loan that has a down payment less than 20%. When a borrower secures an FHA loan, he/she must make an upfront mortgage insurance payment (which can be added to your loan) and a monthly MIP. The goal of the MIP, is to protect lenders from borrower default.
FHA loans are popular for many reasons. They allow for down payment of 3.5%, and typically have lower standard for LTV and credit scores.
How do Mortgage Insurance Premiums Work?
The Federal Housing Administration's role in mortgages is different from the role of Fannie Mae and Freddie Mac. The FHA doesn't "buy mortgages" from banks like Fannie and Freddie do to create market liquidity. Rather, the agency is an insurer of mortgages.
It works like this : The Federal Housing Administration publishes official mortgage guidelines to which banks can choose to underwrite a mortgage. Mortgages which meet these published guidelines can be insured. Loans which the agency insures are typically known as "FHA mortgages".
The Federal Housing Administration is a backstop to the banks. Should your loan ever go into default, the FHA is there is to repay the bank's loss, much like a auto insurer pays a claim due to accident.
Federal Housing Administration is mostly self-funded. Default claims are paid from a fund called the Mutual Mortgage Insurance (MMI) fund which is populated via two types of mortgage insurance premiums paid by FHA-backed borrowers.
The two types of premiums are the FHA Upfront Mortgage Insurance Premium (UFMIP), and the FHA annual Mortgage Insurance Premium (MIP). All FHA-insured homeowners pay both insurance types.
How Much Are FHA Mortgage Insurance Premiums?
The Federal Housing Administration's mortgage insurance requirements vary by loan type and length.FHA Upfront Mortgage Insurance Premiums
The FHA's current upfront mortgage insurance premium (UFMIP) is 1.75 percent of your loan size. For example, if you use an FHA-backed mortgage for a purchase mortgage and your loan size is $300,000, then your Upfront MIP will be 1.75 percent of $300,000, or $5,250.The good news is that Upfront MIP is not paid as cash. Upfront MIP is automatically added to your loan balance by the Federal Housing Administration. With the same $300,000 loan size, then, accounting for Upfront MIP, your actual borrowed amount will be $305,250.
Note that Upfront MIP does not affect your loan's loan-to-value (LTV) calculation. You can make a 3.5% downpayment on your purchase, add the UFMIP to your borrowed amount, and still meet the FHA's minimum downpayment guidelines.
The 1.75% Upfront MIP is collected at closing and paid into the Mutual Mortgage Insurance fund. You'll never be asked to pay it again. This is why it's called "upfront" MIP.
However, if you refinance your FHA mortgage within the first 36 months of closing, the government will give you an upfront MIP refund on your "unused" MIP portion. The refund is based on your original Upfront MIP payment, and decreases by 2 percentage points annually until no money remains to be refunded.
FHA Annual Mortgage Insurance Premiums
The second type of Federal Housing Administration mortgage insurance is the FHA's annual Mortgage Insurance Premium (MIP). Annual MIP is paid in 12 installments per year, and is included in your monthly mortgage payment.Annual MIP is required for all FHA mortgages. The size of your premium will depend on your loan's specific characteristics. As of
, annual FHA MIP rates are as follows:- 15-year loan terms with loan-to-value over 90% : 0.70 percent annual MIP
- 15-year loan terms with loan-t0-value under 90% : 0.45 percent annual MIP
- 30-year loan terms with loan-to-value over 95% : 1.35 percent annual MIP
- 30-year loan terms with loan-to-value under 95% : 1.30 percent annual MIP
Also, note that annual MIP cannot exceed 1.55 percent by law.
How To Get Rid Of Your FHA Mortgage Insurance
FHA mortgage insurance is never permanent. It can either go away on its own, or you can refinance it away.For homeowners whose FHA mortgage pre-dates June 3, 2013, MIP goes away when certain conditions are met :
- 30-year loan term : Annual MIP is automatically canceled once the loan reaches 78% loan-to-value and annual MIP has been paid for at least 60 months.
- 15-year loan term : Annual MIP is automatically canceled once the loan reaches 78% loan-to-value. There is no requirement for MIP to be paid for at least 60 months.
For some quick math, a 30-year FHA mortgage with 3.5 percent downpayment will reach 78% LTV in roughly 11 years. A 15-year fixed with 3.5 percent down would reach 78% LTV in just over two years.
However, you can end your MIP sooner.
Home values have been rising since 2011 and it's given FHA-backed homeowners a veritable home equity boost. Rather than using the FHA Streamline Refinance which required today's new, higher premiums, savvy homeowners have "refinanced out" from the FHA.
With as little as 5% equity, homeowners are finding it cheaper to refinance into a conventional loan from Fannie Mae or Freddie Mac. Mortgage insurance rates are lower via Fannie and Freddie, and insurance payment cancel once the home gets 20% equity.
The math gets even better as your home equity levels increase.
With an FHA loan, MIP rates are flat. Via Fannie Mae or Freddie Mac, though, rates decrease along with your LTV. Unless your loan is grandfathered, ditching the FHA for conventional can be the best way to lower your payment and cancel your MIP.
Cancel Your FHA MIP Faster
FHA mortgage rates are cheap, but the associated premiums are not. FHA MIP can be costly and can add to your long-term housing costs. Thankfully, you have options.Homeowners with FHA loans from May 31, 2009 or prior can use the FHA Streamline Refinance to get access to ultra-low rates and ultra-low premiums. It's a terrific deal for those who want it. Everyone else can look to conventional loans where rates are low and premiums are cheap.
