How to Calculate MIP for FHA a Loan

A man’s hand filling out an FHA loan application next to a calculator, binder and pen Understanding how to calculate the mortgage insurance premium is vital if you are considering applying for an FHA loan (MIP). Mortgage lenders typically need MIP as insurance for FHA loans, and the MIP rate fluctuates according to the loan term and the down payment amount. Prospective borrowers can decide whether an FHA loan suits them by understanding how to calculate MIP.

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 its 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 yearly MIP, which is delivered throughout the loan. The cost of FHA mortgage insurance will be covered in this article.

How Does FHA Monthly Mortgage Insurance Work?

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

The monthly mortgage insurance provided by the FHA safeguards the lender if the borrower fails on the loan. Although the monthly mortgage insurance premiums might be high, they allow buyers to meet the reduced down payment and credit score criteria for FHA loans.

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 to determine the appropriate FHA premium factor. Here is a concise example of the MIP factors:

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% (minimum down payment)	0.85%	for 30 years

As you can see, the MIP calculation varies based on the loan amount and your loan-to-value ratio (LTV).

Here's an example (30 fixed rate):

Sales Price - $200,000
Less Down Payment - $7,000 ($200,000 X 3.5%)
Base Mortgage - $193,000
Loan amount - $193,000 X .85% = $1,640.50 annual 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 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.

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 made 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 have the MIP eliminated 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 for 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 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 both demand additional payments from homeowners in exchange for increased security, but they are different in other ways.

If a borrower defaults on a conventional loan, PMI is the lender's insurance policy. If borrowers put down less than 20% of the buying price of their property, lenders often require it. Moreover, it is necessary if the property's equity is less than 20% while 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 essentially 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 that 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, annually, as a lump sum at closing, or as a combination.
No credit score requirement - Not determined by the borrower's credit score.	Can be canceled - Can be canceled by the borrower once their equity in the property reaches 20%.
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 - Requires a higher credit score and a larger down payment, which can be challenging for some borrowers.
Lifetime Payment - Must be paid for the life of the loan if the borrower made 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

The mortgage insurance premium (MIP) is an insurance policy that protects the lender should the borrower fail on the loan. MIP is required on all FHA loans, which are always paid as part of the regular monthly mortgage payment.

When calculating the MIP, borrowers must consider the loan amount, down payment, and duration. Another element that may impact the MIP is the loan-to-value ratio, which is the proportion between the loan amount and the property's assessed worth. In general, the MIP rises with the loan-to-value ratio.

The term of the loan may also have an impact on the MIP. For instance, the MIP may be lower than that of a 30-year loan with a more excellent loan-to-value ratio if the loan term is 15 years or less and the loan-to-value ratio is less than or equal to 90%.

The MIP guidelines and how they will impact the overall cost of the loan must be understood by borrowers. The MIP can considerably raise the total amount owed throughout the loan and the monthly mortgage payment. Hence, consumers must consider the MIP while determining whether to apply for an FHA loan.

In conclusion, all FHA loans must meet the FHA MIP guidelines, which must be calculated by considering the loan amount, down payment, loan length, and the loan-to-value ratio. When contemplating an FHA loan, consumers should be aware of the MIP guidelines and include them in their budget since they may significantly affect the overall cost of the loan. Borrowers may better understand the entire cost of their loan by working with a lender to estimate the MIP on their loan.

SOURCE:
https://www.hud.gov/program_offices/housing/comp/premiums/sfpcalc
https://www.freedommortgage.com/learning-center/articles/pmi-vs-mip
https://fhalenders.com/fha-mortgage-insurance/
https://mymortgageinsider.com/how-to-get-rid-of-mortgage-insurance-on-fha-loan-today/