Calculate Your FHA Mortgage Insurance Cost

If you're buying a home with an FHA loan, it's crucial to understand the concept of mortgage insurance premium (MIP). As a requirement for all FHA loans, MIP protects lenders if borrowers default on their payments. Calculating the exact amount of MIP can be confusing, but fear not! This article will walk you through the step-by-step process of calculating FHA MIP, clearly understanding how this critical fee is determined and what factors may impact its cost. With this knowledge, you'll be better equipped to make informed decisions about your Mortgage and budget for your new home.

Key takeaways

FHA MIP is not a permanent expense and can be eliminated by refinancing to a conventional loan.
FHA MIP factors include the loan-to-value (LTV) ratio, loan term, and potential FHA policy changes.
There are two types of FHA MIP: upfront MIP (paid at closing) and annual MIP (paid monthly).
The calculation of FHA MIP involves multiplying the loan amount by the annual premium rate and dividing it by 12, then adding the upfront MIP.
MIP rates vary based on the loan amount, LTV ratio, and loan term.
Borrowers who can afford shorter loan terms benefit from lower annual MIP rates.
The possibility of eliminating MIP depends on factors such as the date of loan origination and payment history.

Understanding FHA MIP

The amount of money you might need to pay for FHA MIP or mortgage insurance premiums can sometimes be a confusing aspect of getting an FHA loan. Many borrowers are unaware they must pay this additional fee unless they put down at least 10% on the home purchase. This upfront cost protects the lender if the borrower defaults on their loan.

However, it's essential to understand that the FHA MIP is not a permanent expense. The duration and amount of MIP payments vary depending on several factors, such as the size of your down payment and the length of your loan term.

Educating yourself on what influences the calculation of your FHA MIP is crucial for long-term affordability. For example, if you have a larger down payment or choose a shorter loan term, you may benefit from lower monthly premiums or even see them eliminated sooner than expected.

Knowing these details allows you to make informed decisions during the application process and can save you thousands of dollars throughout your homeownership journey.

The Purpose of the FHA MIP

The purpose of the FHA MIP, or mortgage insurance premium, is to provide financial protection for lenders if borrowers default on their loans. This insurance is required for all FHA loans and is payable by the borrower. While it may seem like an additional expense, it is crucial in allowing more people to become homeowners.

One key factor determining the amount of FHA MIP you must pay is your loan-to-value (LTV) ratio. The LTV ratio represents the percentage of your home's value you borrow through your loan. A higher LTV ratio means a greater risk for the lender, which leads to higher MIP costs.

By providing this insurance, the Federal Housing Administration enables buyers with lower down payments and less-than-perfect credit scores to secure mortgage financing they wouldn't otherwise qualify for. It's important to understand that while paying MIP increases the overall cost of homeownership, it also provides benefits such as flexible credit requirements and lower down payment options compared to conventional loans.

So, even though it may feel like an extra expense at first glance, FHA MIP serves a vital purpose in making homeownership accessible and affordable for a larger pool of prospective buyers.

Factors Affecting FHA MIP

Several variables affect FHA mortgage insurance premiums. The loan-to-value ratio is important (down Payment). Lower down payments have higher MIP rates. If you have a little down Payment and borrow a large proportion of the home's value, mortgage insurance will cost more. However, lower LTV borrowers may qualify for lower MIP rates, saving money over time.

Loan term also influences FHA MIP. Longer times increase mortgage insurance costs. This may sound unpleasant, but shorter loan periods mean larger monthly payments but less interest.

MIP rates and expenses may also be affected by FHA policy changes. Since these changes might dramatically affect mortgage insurance costs, you must keep informed.

Upfront MIP vs. Annual MIP

An FHA home loan has two mortgage insurance premiums: upfront and annual (monthly MIP).

Upfront MIP is paid at closing. A one-time payment that may be financed or paid out of pocket. The upfront mortgage insurance can be paid in cash at settlement or funded in the loan. The upfront premium is 1.75% of the "base loan amount."

The base mortgage is the loan amount without a financed mortgage insurance premium.

Annual MIP is a continuous premium that FHA borrowers must pay. This is paid monthly and applied to your Mortgage. An annual MIP lets borrowers pay part of the amount over time instead of everything at once. However, yearly MIP may cost more than upfront MIP since it lasts the entire loan duration.

How to Calculate the FHA MIP

To determine the annual MIP, you can calculate it by taking the loan amount, multiplying it by the annual premium rate, and then dividing the result by 12 (see below).

The FHA utilizes charts to establish the monthly Mortgage Insurance Premium (MIP), contingent on the loan amount and term.

2023 MIP Rates Greater Than 15 Years (30-year term)

If you take out a typical 30-year mortgage or anything more significant than 15 years, your annual mortgage insurance premium will be as follows:

Base Loan Amount	Loan to Value	Annual MIP
≤ $726,200	≤ 90%	0.50%
≤ $726,200	> 90% but ≤ 95%	0.55%
≤ $726,200	> 95% (3.5% down payment)	0.55%
> $726,200	≤ 90%	0.70%
> $726,200	> 90% but ≤ 95%	.70%
> $726,200	> 95%	.75%

2023 MIP Rates 15 Years or Less

Homebuyers who can afford to pay off their loans quicker and opt for a shorter term, such as a 15-year mortgage, will benefit from lower mortgage insurance premiums, as follows:

Base Loan Amount	Loan to Value	Annual MIP
≤ $726,200	≤ 90%	0.15%
≤ $726,200	> 90%	0.40%
> $726,200	≤ 78%	0.15%
> $726,200	> 78% but ≤ 90%	0.40%
> $726,200	> 90%	0.65%

MIP Calculation Example

I assume you are purchasing a home with an FHA mortgage for a 30-year years. Assuming a sales price of $200,000. The monthly MIP is calculated as follows:

Sales Price = $200,000

Down Payment = 3.5% ($7,000)

Base Mortgage = $193,000 ($200,000 less down Payment of $7,000)

$193,000 (base mortgage) X .55% = $1,061.50 (annual MIP)

To make it easier on the borrower's budget, the annual fee is split into 12 payments and added to the monthly mortgage payment ($88.46)

When Does MIP Go Away?

If you were to close today for an FHA loan of 30 years with a minimum down payment of 3.5%, you would not be able to drop the MIP.

FHA MIP can be discontinued depending on when you closed your loan and your payment history. If your loan was created on or after June 3, 2013, and you made a 10% down payment, you could remove MIP after 11 years. For loans originated before June 3, 2013, if you reach a 78% Loan-to-Value (LTV) ratio, MIP may be eliminated after five years. This information is as of June 9, 2023.

Most borrowers seek a conventional mortgage when they have enough equity to avoid the MIP cost.

Conclusion

In summary, while FHA MIP may initially seem like an additional cost, it is crucial in making homeownership accessible to a broader range of borrowers. However, borrowers often seek to refinance to a conventional loan once they have enough equity to avoid ongoing MIP costs. Understanding these details empowers borrowers to make informed decisions about their Mortgage and budget for their new home.

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/