How Much Are FHA Upfront and Annual Mortgage Insurance Fees?

If purchasing a home with an FHA loan, you must pay mortgage insurance premiums (MIP). These premiums protect the lender if you default on your loan. Understanding how to calculate your FHA mortgage insurance premiums is important because it can affect your monthly payment and overall homeownership budget.

Calculating MIP involves a few factors, including the amount of your down payment, your loan term, and the size of your loan. By knowing how to calculate these variables, you can get an accurate estimate of your MIP payments for the life of your FHA loan.

What is the FHA Mortgage Insurance Premium (MIP)?

Mortgage insurance premiums (MIP) are a requirement of the FHA for all borrowers to safeguard lenders in case of a loan failure. Different MIP rates apply depending on the loan's size and the down payment. Using this insurance coverage, borrowers may get mortgages at lower costs than conventional lenders.

Due to their low down payment and flexible credit score requirements, FHA loans are preferred among first-time and low- to moderate-income home buyers. The MIP consists of two components: the upfront MIP, which is paid at closing, and the annual MIP, which is paid throughout the loan. The cost of FHA mortgage insurance will be covered in this article.

How to Calculate the FHA MIP

While obtaining an FHA loan, homeowners must pay monthly insurance from the FHA and their regular mortgage payment. This payment, often called the yearly MIP, is paid out throughout the loan and is determined by the loan's size and the loan-to-value ratio.

If the borrower defaults on the loan, the FHA's monthly mortgage insurance protects the lender. Although the monthly mortgage insurance premiums might be high, they allow buyers to meet FHA loans' reduced down payment and credit score criteria.

While planning for their FHA loan payments, borrowers should remember to account for the monthly mortgage insurance cost and remember that this payment will be necessary throughout the loan.

The first step in calculating the MIP is determining the appropriate FHA premium factor. Here is a concise example of the MIP factors:

Down Payment	MIP	Duration
10% or greater	0.50%	for 11 years.
5% to 9.99%	0.50%	for 30 years.
0 to 4.99% (minimum down payment)	0.55%	for 30 years.

How is FHA Mortgage Insurance Calculated?

Here's an example of how to calculate the FHA MIP (30 fixed rates):

Sales Price: $200,000
Less Down Payment: $7,000 ($200,000 x 3.5%)
Base mortgage: $193,000
Loan amount: $196,378 (includes upfront mortgage insurance) x .55% = $1080.076 annual MIP
Divide $1080.076 by 12 to get $90.00 per month as the annual MIP cost.

$136.71 is added to your monthly mortgage payment.

The amount of money you will spend on the property is one of the most significant elements to consider when selecting mortgage insurance coverage. This will help reduce your MIP rate and keep your monthly payment on track.

How to Get Rid of MIP on an FHA Loan

If you took out an FHA loan before June 3, 2013, and your loan amount has dropped below 78% of the purchase price, you can request a reduction in your yearly mortgage insurance fee.

However, if you make a down payment of less than 10% on an FHA loan approved after that date, the mortgage insurance premium (MIP) cannot be waived and will be in effect for the entire term of the loan.

If you put down 10% or more on an FHA loan approved after June 3, 2013, you can ask to eliminate the MIP after 11 years. Even if you pay off your loan early and have a loan-to-value (LTV) ratio of 78%, you still need to wait 11 years to pass.

If you don't want to pay the MIP, your only option is to switch to a loan program not insured by the FHA. Knowing the rules and regulations regarding FHA mortgage insurance is essential when planning your finances, especially when estimating the total cost of an FHA loan.

The bottom line is that you cannot remove the MIP if you have made the minimum down payment since 2013.

PMI vs. MIP Comparison

Private mortgage insurance (PMI) and mortgage insurance premiums (MIP) are the two forms of mortgage insurance to consider when purchasing a house. These two programs are similar in that they demand additional payments from homeowners in exchange for increased security, but they differ in other ways.

PMI is the lender's insurance policy if a borrower defaults on a conventional loan. If borrowers put down less than 20% of the purchase price of their property, lenders often require it.

Moreover, it is necessary if the property's equity is less than 20% when refinancing. Depending on the amount of the down payment and other variables like credit score, PMI rates might vary but typically range from 0.3% to 1.5% of the entire loan amount annually.

By now, you should understand the FHA MIP requirement.

The Benefits of FHA MIP Over Conventional PMI

For many borrowers, the decision to go with FHA MIP or PMI comes down to cost. But other factors can sway that decision, such as how long you plan on living in the home and how much risk you're comfortable taking.

The two types of insurance products cover the same: they protect lenders if a borrower defaults on their mortgage loan. However, some distinct advantages come along with FHA MIP over PMI.

FHA MIP offers more protection to lenders than conventional mortgage insurance because it adheres to specific requirements set by the Federal Housing Administration (FHA).

These requirements include minimum credit score limits and down payment amounts, which help ensure borrowers are more likely to repay their loans even in unpredictable economic climates.

Pros and Cons of MIP vs. Conventional PMI

MIP (FHA loans)	PMI (conventional loans)
Pros	Pros
Accessible: Allows borrowers to qualify for an FHA loan with a lower credit score and down payment.	Easier to remove: can be removed once the borrower's equity in the property reaches 20%.
Predictable cost: calculated according to the size of the loan and the loan-to-value ratio and spread over the life of the loan.	Flexible payment options can be paid monthly or annually as a lump sum at closing or as a combination.
No credit score requirement: not determined by the borrower's credit score.	Once the borrower has 20% equity in the property, they can cancel it.
Cons	Cons
Higher cost: This can be more expensive than PMI, making it harder for some borrowers to afford an FHA loan.	Harder to qualify for; it requires a higher credit score and a larger down payment, which can be challenging for some borrowers.
Lifetime Payment: This must be paid for the life of the loan if the borrower makes a down payment of less than 10%.	Not available for government-backed loans Can't be used for government-backed loans such as VA or USDA.
difficult to remove	may require refinancing: In some cases, refinancing the loan may be necessary to

Conclusion

In conclusion, calculating your FHA mortgage insurance premiums may seem like a daunting task, but with the right information and tools, it can be done easily. By determining your loan-to-value ratio, multiplying it by the annual premium rate and dividing by 12, you can arrive at an estimate of what your monthly insurance premium payment will be.

Additionally, borrowers with higher credit scores will pay lower premiums. It's important to remember that mortgage insurance is required for all FHA loans and protects lenders in case of default.

Understanding how to calculate these premiums can help you make more informed decisions about your homebuying journey. With this knowledge in hand, you'll be better equipped to choose the right home financing option for you and your family.

SOURCE:
Monthly (Periodic) Mortgage Insurance Premium Calculation
Appendix 1.0 – Mortgage Insurance Premiums