Sufficient down payment is one of the largest hurdles when buying a home, especially for first time home buyers. Fortunately, first time and repeat buyers have an FHA loan to the rescue. An FHA loan feature which allows the low 3.5% down payment is called FHA mortgage insurance. It is also called FHA MIP (mortgage insurance premium). Primarily, mortgage insurance is in the form of monthly or up-front fees. FHA charges both an up-front, financed fee and a monthly one. Even though FHA charges two fees which often make it the most expensive mortgage insurance compared to other loans, it is still one of the most popular home loans available. Reasons are plentiful including low down payment, allowing gift for down payment, gift of equity purchases, liberal credit guidelines, flexible debt ratios, and more. When it comes to FHA mortgage insurance premiums, there are key points to know…
- How much is FHA mortgage insurance?
- Is mortgage insurance paid out of pocket?
- Does FHA monthly MIP go down or stay the same?
- Is there a way to pay less FHA MIP?
- Can I get rid of mortgage insurance?
How Much is FHA Mortgage Insurance?
So, you know that there are two types of FHA insurance. The first one which is charged up-front is called an FHA funding fee. Basically, this fee keeps the Federal Housing Administration in business. Actually, every FHA loan closing pays FHA 1.75% of the loan amount. For examples, a $100,000 loan pays FHA $1,750 or $200,000 loan pays them $3,500. Besides keeping FHA in business, their funding fee is one of the factors that keep FHA interest rates low. Plus, it takes the risk off of the American tax payer paying for the program.
FHA Monthly Mortgage Insurance Premiums – Terms > 15 Years
|Base Loan Amount||Loan to Value||Monthly MIP|
|< $625,500||< 95%||.80%|
|< $625,500||> 95%||.85%|
|> $625,500||< 95%||1.00%|
|> $625,500||> 95%||1.05%|
FHA Monthly Mortgage Insurance Premiums – Terms 15 Years or Less
|Base Loan Amount||Loan to Value||Monthly MIP|
|< $625,500||< 90%||.45%|
|< $625,500||> 90%||.70%|
|> $625,5001||< 90%||.70%|
|> $625,500||> 90%||.95%|
How Do I Pay FHA Mortgage Insurance?
Luckily for FHA borrowers, FHA allows the funding fee to be financed and the monthly MIP is included in the borrower’s monthly payment. So, the 1.75% FHA funding fee is automatically added on top of the base loan amount. Although, a borrower may pay the funding fee out of pocket at closing. In order for the borrower to pay the fee, the whole fee must be paid. Otherwise, the fee must be financed. Strange rule, but it is their rule. As an additional bonus, the FHA funding fee may also be paid through a lender credit, seller paid closing costs, or paid by their Realtor.
The monthly FHA mortgage insurance is factored into the monthly escrow account. Therefore, the required monthly escrow account includes the property taxes, any required insurances, and the monthly FHA MIP. Now, does the FHA mortgage insurance stay the same, increase, or decrease? Let’s find out!
Does FHA Mortgage Insurance Premium Ever Go Down?
Unlike conventional monthly mortgage insurance that stays the same each month, FHA mortgage insurance premiums go down each year. As a rough estimate of the reduction each year, divide the monthly PMI by the loan term years. So, if the monthly PMI is $120 and the term is 30 years, a rough annual reduction would be $4. Then, year two would be about $116 in PMI. The best way to see this reduction is to view an amortization schedule. An amortization schedule is designed to show the exact breakdown of principal, interest, and mortgage insurance paid with each payment. As payments are made, the following happens each month.
- Principal paid increases
- Interest paid decreases
- FHA mortgage insurance decreases
Keep in mind, these are subtle changes. Yet, they are all positive changes! Ask your loan officer for an amortization to see how much your monthly reduction is each month.
How Can I Pay Less FHA Mortgage Insurance?
Sorry, but there is nothing that can be done about the up-front mortgage insurance or funding fee. 1.75% no matter what. However, there are options for reducing the monthly mortgage insurance.
Two Ways to Reduce FHA MIP
- More down payment
- Shorter loan term
Remember the 2 charts above showing how much the monthly FHA mortgage insurance costs? Did you notice that higher down payments reduce the PMI? On the 20 – 30 year terms, putting down 5% or more reduces the PMI rate by .05%. It’s not a lot, but it is a saving. On a 10 – 15 year term, a 10% down payment reduces the PMI by .25%.
The next option is shortening the loan term to 15 years or less. Also, notice in the second chart that the PMI rates decrease dramatically for these shorter terms. Although, to reach these lower mortgage insurance rates, a higher down payment and shorter term may make the loan less affordable for many borrowers. That’s why most FHA buyers choose the lower 3.5% down payment and a 30 year term.
Can I Get Rid of FHA MIP?
FHA mortgage insurance cancellation is commonly misunderstood. As many borrowers and even real estate professionals believe the monthly mortgage insurance cancels once the loan is paid under 80% of the value. Regretfully, only conventional loans offer this feature. FHA loans are different. If a buyer puts down less than 10% down towards the purchase price, the FHA mortgage insurance continues for the life of the loan. Although, don’t forget it does reduce each year.
Conversely, if a buyer puts down 10% or more towards the purchase price at closing, the monthly MIP may cancel after 11 years. With how often borrowers sell or refinance, chances are not great of reaching 11 years with the same mortgage.
On a refinance, the same rules apply except it goes by the appraised value. If a homeowner borrows 90% or less of the FHA appraised value, then the 11 year cancellation applies. If borrowing more than 90%, FHA MIP continues for the life of the loan.