fha loans are underwritten by the federal housing administration, a subsidiary of the u.s. department of housing and urban development (hud). Because FHA-approved lenders take on more risk due to lower credit scores and down payment requirements, borrowers are responsible for paying FHA mortgage insurance.
fha borrowers have to pay two types of mortgage insurance premiums: up front and annual. The Advance Mortgage Insurance Premium (UFMIP) is collected at the closing of your mortgage when you first take out your loan, while the Annual Premium is an ongoing obligation that you pay annually. These mortgage insurance premiums (MIPs) protect the lender in the event of a mortgage default. in many cases, you are responsible for fha mip for the life of your loan.
how much does fha mortgage insurance cost?
Advance mortgage insurance premium is 1.75% of your loan amount and is due at closing. If you’re borrowing $250,000, for example, your starting mip will be $4,375 ($250,000 x 1.75% = $4,375).
The 1.75% ufmip applies to most fha loans, regardless of loan amount or term, except for the following:
- simplified refinancing and some simple refinancing (0.01% ufmip)
- Hawaiian homelands (2.344% to 3.80% ufmip, depending on loan term)
- indian lands
- have a credit history free of defects that could prevent you from qualifying for a refinance
- improve your credit score to 620 or higher
- build at least 20% of home equity (otherwise pay pmi after refinance)
fha mip chart for loan terms over 15 years
fha mip chart for loan terms less than or equal to 15 years
source: us. department of housing and urban development
The ongoing annual mortgage insurance premium ranges from 0.45% to 1.05%, divided by 12, and paid as an addition to the monthly mortgage payment. how much you will pay depends on your loan-to-value (ltv) ratio and repayment term.
fha mip versus pmi
Mortgage insurance premiums apply specifically to fha loans, but conventional loans come with a similar requirement, called private mortgage insurance (pmi).
Like fha mortgage insurance, pmi’s purpose is to protect the lender if you default on your monthly mortgage payments. Unlike fha mip, there is no upfront premium, although you may have the option to pay pmi in a lump sum at closing.
As mentioned above, in many cases, FHA mortgage insurance premiums are in effect for the life of your loan. on the other hand, you can get rid of pmi after building 20% equity in your home.
how to get rid of fha mortgage insurance
One of the main ways to get rid of fha mip is to make at least a 10% down payment at closing. you will continue to pay premiums, but only for 11 years.
another way to get fha mip removal is to refinance into a conventional loan; however, there are several things you’ll need to do to prepare for a refinance, including:
Still, fha mortgage insurance may not bother you much if you’re a first-time homebuyer. The benefit of making a small down payment and owning a home sooner, rather than saving for a 20% down payment, may outweigh the disadvantage of taking on this added cost of the loan.