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FHA Mortgage Insurance Premiums Explained
This video breaks down the essentials of FHA mortgage insurance premiums. Before getting into the details, here are the key points:
Purpose:
It protects the lender if you default. This protection is important because FHA loans usually require low down payments.
Two Key Components:
Upfront Premium: Typically, 1.75% of the loan amount.
Monthly Premium: This fee varies based on your loan scenario.
Impact of Down Payment:
With a smaller down payment, you’ll pay the monthly premium for the life of the loan.
With a larger down payment, the premium may drop off after 11 years.
Refinancing Options:
As you build equity, refinancing into a conventional loan might allow you to eliminate FHA mortgage insurance.
Check it out if you’re considering an FHA loan and want to know more about mortgage insurance.
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Excellent and informative topic presentation on FHA mortgage insurance premium Chad.
All About FHA Mortgage Insurance Premiums (MIP): 15-Year & 30-Year Loans
Mortgage Insurance Premiums (MIP) serve as a form of protection to lenders in case the borrower defaults. Using an FHA loan comes with the downside of always having to pay MIP premiums. This applies for both 15 and 30 year FHA loans. Still, the payments for both duration and cost differ based on the following:
✔️ The duration of the loan (15 or 30 years)
✔️ The ratio of Loan-to-Value (LTV) (how much of the home’s value is covered by the loan)
✔️ The amount of the loan (Above or below a certain level)
This guide will explain the costs of FHA mortgage insurance, how it works, and its application in various scenarios.
🟢 Upfront Mortgage Insurance Premium (UFMIP) – Paid Once
Knowing about the monthly costs of FHA mortgage insurance is important, but you should also understand that all FHA loans require Upfront Mortgage Insurance Premium (UFMIP) to be paid at closing.
📌 UFMIP is always 1.75 % of the base loan amount.
💡 Example: If you’re getting a FHA loan for $300,000, your UFMIP will be $5,250. This figure can either be paid upfront or added to the loan balance.
🟢 Payment Secrets: MIP (Mortgage Insurance Premium) – Monthly Incurred Costs
MIP is paired with your mortgage payments, increasing what you owe each month. How much you pay is dependent on:
✅ FHA loan term (15 years or 30 years)
✅ Loan to Value ratio (LTV)
✅ Total amount of loan
How MIP Works with 30 Year FHA Loans
With most 30-year FHA loans, any borrower will pay MIP for the full term of loan or at least for 11 consecutive years if they place down less than 10% towards the loan.
📌 Pay MIP for 11 years if remaining down payment is 10% or more.
📌 Must pay MIP for all periods of the loan unless refinanced if down payment is < 10%.
💡 Example 1: John bought an FHA loan.
Home Price: $400,000
Loan Amount: $390,000 (after 2.5 percent down payment)
LTV Ratio: 97.50 percent
Annual MIP Rate: 0.55 percent
Annual MIP Cost: $2145 per year ($179 per month)
Because John placed less than 10 percent as a down payment, he will always have to pay MIP unless he refinances to a conventional loan.
How MIP Functions on 15-Year FHA Loans
With a 15-year FHA loan, the MIP rates tend to be lower than on the 30-year option.
📌 If your LTV is 90% or lower, pay MIP for a maximum of eleven years.
📌 If your LTV is higher than 90%, you will be paying MIP throughout the entire term of the loan.
💡 Example 2: Sarah Buys Her Home with A 15-Year FHA Loan
Home Price: $250,000
Loan Amount: $225,000 (following 10% down payment)
LTV Ratio: 90%
Annual MIP Rate: 0.15%
Annual MIP Cost: $337 per year or $28 per month
Because Sarah put down 10 percent and has a 15-year loan, she only pays MIP for eleven years, which helps her save in the long run.
Case Scenario: What Happens If the Loan Amount Exceeds FHA Limit?
FHA imposes limits on loans, thus if your loan is over $726,200 then the MIP rates increase slightly.
💡 Example 3: Mike Buys A Home in A High-Cost Area
Home Price: $900,000
Loan Amount: $850,000
LTV Ratio: 95%
Annual MIP Rate: 0.75%
Annual MIP Cost: $6,375 per year, or $531 per month.
Mike is required to pay MIP for the consective thirty years since his LTV is greater than 90% and he did not put down ten percent.
🔹 Steps to Eliminating FHA MIP Early
For those looking to remove FHA mortgage insurance payments, consider the following steps:
✔️ At closing, pay a 10% or greater down payment – This reduces your MIP on 30-year loans to 11 years.
✔️ Refinance into a conventional loan – If your home appreciates and you have 20% equity, you can refinance to completely remove MIP.
✔️ Obtain a 15-year FHA loan with low LTV – Shorter duration loans have lower MIP rates and term length.
🔹 Final Thoughts – FHA Mortgage Insurance Can Be Costly, But It Helps Homebuyers!
✅ FHA loans offer to buyers with low credit scores and low down payment mortgages.
✅ MIP protects lenders from default by the borrower and increases the monthly payment.
✅ MIP term is reduced with a down payment of 10% or more.
✅ Once enough equity is gained, MIP can be removed by refinancing to a conventional loan.
📢 Are you considering an FHA loan? Pay special attention to MIP costs and how they impact your payments. If you’re in search of the most competitive FHA mortgage rates, reach out to a lender now!
📌 Looking for an FHA loan? Contact Gustan Cho Associates NMLS 873293 to receive professional mortgage advice.
📞 For Immediate Help: 800 900 8569
📧 Message Here: alex@gustancho.com
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