How to Calculate Pmi for FHA Loan?

Animated calculatorMortgage insurance premiums (MIPs) are required for all FHA loans. They are part of the mortgage payment and protect the lender in case of default.

The premiums are usually financed into the loan, but can be paid in cash. The amount of the premium depends on the size of the loan, the loan-to-value ratio (LTV), and the length of the mortgage. The premium can be rolled into the loan amount or paid in cash at closing.

 How Does Upfront MIP Work?

The Federal Housing Administration (FHA) loan is popular owing to its low down payment and high credit score requirements. With a reasonable down payment, buyers with these credit scores may enter the housing market.

When it comes to FHA mortgage closing fees, a modest down payment might result in increased expenses. Prior to examining the specifics of an insurance coverage, it is essential to comprehend how it will effect your financial condition.

The monthly cost of an FHA insurance policy is often equivalent to that of a private mortgage insurance (PMI) policy and other insurance plans. The purpose of this insurance is to protect the lender in the case of a foreclosure.

The upfront cost of 1.75 percent of the loan amount is rolled into the monthly payment, while the yearly MIP is typically 0.85 percent.

How is FHA Upfront MIP Calculated?

FHA loan graphicFHA mortgage insurance, or MIP, is made up of two parts.

The first is a 1.75 percent upfront mortgage insurance charge on the loan amount.

This must be paid at the time of closing. As an example, if your purchase price is $200,000 and your loan amount is $193,000, then your upfront mortgage insurance premium at closing will be $3,377.50 ($193,000 X 1.75%)

Sales Price = $200,000
Less down payment = $7,000 (3.5%)
Base loan amount = $193,000 ($200,000 - $7,000)
Funding fee = $3,377.50 ($193,000 X 1.75%)
Final Loan Amount = $196,378 ($193,000 + $3,375)

FHA MIP Calculation

The calculation of this payment will vary based upon the loan amount and your down payment amount or loan to value ratio (LTV).

Example (30 fixed rate):
Loan amount - $193,000 X .85% = $1,640.50 annula MIP

The annual MIP cost is $1,640.50 divided by 12 = $136.71 monthly)

The $136.71 is added to your monthly mortgage payment.

The loan amount is less than $625,000, the loan to value is larger than 95%, and the mortgage term is longer than 15 years, as shown in the table below.

Down Payment MIP Duration
10% or greater 0.80% for 11 years
5% to 9.99% 0.80% for 30 years
0 to 4.99% 0.85% for 30 years
Using the FHA MIP chart shown above, the FHA MIP rate for the minimum down payment required is 0.85%.

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

When Can FHA MIP Be Removed?

From the chart above, you can see that the monthly mortgage insurance can only be removed with a 10% down payment.

Can I Finance the FHA's Upfront Mortgage Insurance Fee?

FHA mortgage insurance graphicThe upfront charge for mortgage insurance may be financed or rolled into the loan. This is a tremendous advantage for low-income folks who have not saved a substantial amount of money for closing expenses. The payment must be made in cash or via financing.

  • Paid in cash at settlement
  • Paid by the lender (with a higher interest rate)
  • Paid by the seller (as a sales concession)
  • Paid with gift funds

The charge cannot be divided by financing part of it and paying the remainder in cash.

  • Financing the charge has no effect on your DTI or the amount of loan you qualify for.
  • The upfront charge is not included in the minimum down payment requirement.

If you finance the FHA up front mortgage insurance charge, you'll have to pay interest on it for the duration of the loan's term.


Can Gift Funds Pay the Upfront FHA Mortgage Insurance?

According to the regulations of the Federal Housing Administration, a close friend or relative may offer you an upfront mortgage insurance policy as a gift. This kind of insurance may help cover the down payment and closing costs for a mortgage.

How to Get Rid of Mip on a FHA Loan?

You may seek a decrease in your annual mortgage insurance premium if you were issued an FHA case number prior to June 3, 2013 and your loan amount has dropped below 78%.

If your FHA loan was granted after June 3, 2013 and you made a down payment of 10 percent or more, you may request that the FHA mortgage insurance premium (MIP) be removed after 11 years.
Even if you pay off your loan early and have an LTV of 78%, you will still need to wait 11 years.

If your FHA loan was authorized after June 3, 2013 with less than a 10 percent down payment, the FHA mortgage insurance premium (MIP) will remain in force for the duration of the loan and will not be cancelled.

In this situation, the only way to avoid the FHA mortgage insurance premium is to switch to a loan program that is not guaranteed by the FHA.

PMI on conventional loans vs. MIP on FHA loans

There are a few differences between the mortgage insurance premiums charged by the Federal Housing Administration and the private mortgage insurance often used for conventional loans.

For instance, the monthly premium for private mortgage insurance is contingent upon the loan amount and your credit score.

If the loan amount is less than 80 percent of the home's original value, you may request a decrease in your annual mortgage insurance premium. If it is more than 78 percent, the lender will cancel or withdraw the insurance coverage.

Private mortgage insurance will result in a higher monthly payment than mortgage insurance through the Federal Housing Administration.

For example, the monthly premium for private mortgage insurance on a $235,000 loan would be $236.96, compared to $166.46 for FHA mortgage insurance.

Rotating question markFHA Mortgage FAQ

Q. Does FHA mip insurance cover death?
A. No, FHA mortgage insurance does not cover death. The purpose of FHA mortgage insurance is to protect the lender in case the borrower defaults on their loan.

Q. Does FHA mortgage insurance increase?
A. The FHA mortgage insurance premium (MIP) is required for all FHA loans.

The premium can be paid in cash at closing, or it can be financed into the loan. The MIP is a percentage of the loan amount, and varies based on the length of the loan, the loan-to-value ratio, and the type of mortgage.

For most 30-year fixed rate mortgages, the MIP is 0.85%. The monthly MIP is calculated annually, consequently, the monthly cost decreases.

Q. How is FHA MIP paid?
A. FHA mortgage insurance premiums (MIP) are paid by the borrower, and are usually included in your monthly mortgage payment. The premium is a percentage of the loan amount, and varies based on the length of the loan term and the down payment amount.

For example, on a 30-year fixed-rate loan with a down payment of 3.5%, the MIP would be 0.85% of the loan amount.

Q. What does FHA MIP insurance cover?
A. The FHA MIP monthly insurance covers the costs associated with a lender's guarantee to a FHA-insured mortgage. This includes losses that may occur if a borrower defaults on their mortgage payments.

Conclusion

In conclusion, the FHA mortgage insurance premium is a necessary cost for those looking to purchase a home with an FHA loan. However, it is important to understand how the premium is calculated and what factors can affect the overall cost. By following these simple steps, borrowers can confidently navigate the mortgage insurance process and make an informed decision about their home purchase.