An FHA loan is good if you have a lower credit score or little savings for a down payment. With these loans, you must pay a mortgage insurance premium (MIP) to secure it.

Putting less than 20% down for conventional loans means you pay private mortgage insurance (PMI). But FHA loans need mortgage insurance too. They differ from conventional loans as they require an upfront mortgage insurance premium (UFMIP) and an annual premium (MIP).

Let's explore FHA MIP and UFMIP to understand the costs across different loan terms.

 

What’s a Mortgage Insurance Premium?

A mortgage insurance premium (MIP) is a specific insurance paid on FHA loans, offering protection to your mortgage lender if you can't repay the loan. It's beneficial for home buyers as it allows for smaller down payments, as without MIP, lenders might demand larger down payments for loan approval.

 

What's the Cost of an FHA Mortgage Insurance Premium?

An FHA loan's mortgage insurance premium (MIP) includes an initial payment and a yearly fee. The total amount you pay for both relies on your loan amount.

Upfront FHA MIP

When you get an FHA loan, you'll pay an upfront mortgage premium (UFMIP) equal to 1.75% of your base loan amount. This payment can be made at the closing or included in your loan amount. UFMIP safeguards the lender in case of mortgage payment defaults.

An FHA loan accepts a down payment as low as 3.5% of the purchase price. However, in exchange for this low down payment, you must pay UFMIP and a mortgage insurance premium (MIP). This makes FHA loans attractive for first-time home buyers who lack equity from a previous home for their down payment.

For instance, if you take out a $150,000 mortgage, you'll need to pay an initial $3,500 as an upfront payment for MIP. This payment is made at closing or can be added to your loan balance. You only pay this upfront fee once unless you refinance or get another FHA loan later.

Annual FHA MIP

Your yearly FHA mortgage insurance expenses depend on your loan-to-value ratio (LTV), down payment size, and loan term length. Lenders compute this annual payment as a fraction of your base loan value.

Most FHA lenders include the annual MIP in your monthly mortgage payment. After getting initial approval, you'll receive a loan estimate detailing your monthly mortgage payment and the annual MIP. Divide your total MIP by 12 to determine your monthly premium, helping you assess if it aligns with your budget.

Loans 15 Years or Less

For loans lasting 15 years or less, your annual MIP payments depend on various scenarios. For instance:

• Borrowing $726,200 or less with a 10% or more down payment means paying 0.15% annually for the initial 11 years, equaling $225 per year or $18.75 monthly on a $150,000 loan.
• Less than 10% down on a loan of $726,200 or less results in a 0.40% annual fee for the entire loan term, equating to $600 yearly or $50 per month for a $150,000 loan.
• Loans exceeding $726,200 with a down payment of 22% or more entail a 0.15% annual charge for the first 11 years, equal to $3,150 yearly or $262.50 monthly on a $700,000 loan.
• With a down payment between 10% and 22% on loans over $726,200, the first 11 years have a 0.40% annual fee, amounting to $2,800 per year or about $233.33 monthly for a $700,000 loan.
• For loans above $726,200 with less than a 10% down payment, an annual charge of 0.65% applies throughout the mortgage term, resulting in $4,450 annually or around $317.17 monthly on a $700,000 loan.

Loans Over 15 Years

For loan terms exceeding 15 years, like the common 30-year term, the annual MIP payments vary based on the loan amount and down payment percentage:

• Borrowing less than or equal to $726,200 with a down payment of 5% or more results in an annual payment of 0.50%, equating to $750 per year or $62.50 per month on a $150,000 loan.
• If the down payment is less than 5%, the annual payment increases to 0.55%, totaling $825 per year or $68.75 monthly for a $150,000 loan.
• For loan amounts exceeding $726,200 with a down payment of 5% or more, the annual payment is 0.70%, reaching $4,900 per year or about $408.33 per month for a $700,000 loan.
• Suppose the down payment is less than 5% on a loan over $726,200. In that case, the annual payment becomes 0.75%, totaling $5,250 per year or approximately $437.50 monthly for a $700,000 loan.

 

How Long Must You Pay for FHA Loan Insurance?

Before 2013, FHA Mortgage Insurance Premium (MIP) worked similarly to Private Mortgage Insurance (PMI) on conventional loans. With conventional mortgages, once you achieve 22% home equity, the lender automatically cancels the PMI.

Today's FHA lenders don't end your MIP when you reach a specific home equity. The duration of MIP payments hinges on your down payment: if you put down 10% or more, you'll pay MIP for the initial 11 years. But with less than 10% down, MIP continues throughout the loan's lifespan.

 

Can You Avoid FHA Mortgage Insurance? 

No, if you're going for an FHA loan. All FHA loans come with mortgage insurance, either throughout the entire loan period or for a specific number of years.

Ways to dodge FHA mortgage insurance:

• Go for a Lender-Paid Mortgage Insurance (LPMI) Loan

If you can't or don't want to make a 20 percent down payment, consider an LPMI loan. The lender covers the PMI, but you'll have a slightly higher interest rate in return.

• Check Out a Piggyback Loan

Make a 10 percent down payment and then take a second mortgage for another 10 percent, totaling a 20 percent down payment and avoiding PMI. But remember, you'll be repaying two loans.

• Explore Special Programs

Some programs let you make a low down payment without PMI. Examples include VA loans (for eligible military members) and programs offered by major banks, especially for first-time homebuyers.

• Consider a Different Lending Program

Instead of FHA, you could go for a conventional loan with a 20 percent down payment. There's also the option of starting with an FHA loan, dealing with its MIP, and then refinancing into a non-FHA loan once you've built up enough home equity (20 percent).

Suppose you're considering refinancing an FHA loan with another FHA-insured mortgage within three years. In that case, you might get a refund credit for the upfront MIP, lowering your payment on the new refinanced mortgage. But if you switch to a conventional mortgage, there won't be a refund for the upfront mortgage insurance premium.

 

UFMIP Vs. MIP

With an FHA loan, you have to pay an annual mortgage insurance premium, and it's not the same as the upfront mortgage insurance premium. While the UFMIP is a one-time payment, the MIP is like a regular fee for having an FHA loan. You include the annual MIP in your monthly mortgage payment, which can be between 0.45% and 1.05% of the loan amount. The exact amount depends on your down payment and loan term.

 

Refinancing and UFMIP

Thinking about refinancing your loan? You should go for an FHA Streamline Refinance. With this, you can refinance your existing FHA-insured mortgage without having to submit credit information. To qualify for this refinance, you should:

• Have an FHA-insured loan that you plan to refinance.
• Stay current on your mortgage payments; don't be behind.
• Experience a clear benefit from the refinance (in simple terms, it should be good for you to choose the FHA Streamline Refinance).

Remember, even with an FHA Streamline Refinance, you still need to pay mortgage insurance. There's a UFMIP (Upfront Mortgage Insurance Premium) of 0.55% that you'll be responsible for.

 

Can You Get a UFMIP Refund?

Suppose you closed on an FHA loan on or after January 1, 2001, and you're paying off or refinancing the loan within 5 years. In that case, you might qualify for a partial UFMIP refund. Another opportunity for a refund arises if you refinance your existing FHA loan with another FHA loan within 3 years.

Refunds are also possible if you overpay, pay for an invalid case number, or encounter a non-endorsed case situation that the lender or HUD cancels.

 

The Bottom Line

FHA loans require a mortgage insurance premium (MIP) for approval. This includes an upfront mortgage insurance premium (UFMIP) and an annual premium (MIP), which impact the total loan costs. It's crucial to grasp these expenses if you have an FHA-insured loan.