As compared to conforming loans and jumbo mortgages, Federal Housing Administration (FHA)-backed loans are popular for several reasons.
- FHA allows a 3.5% downpayment
- FHA allows refinances without appraisal
- FHA mortgage rates are usually really low
As compared to loan types including conventional, USDA and military loans, FHA mortgage insurance premiums (MIP) are sometimes cumbersome and costly.
If you’re going to use an FHA-backed mortgage for your upcoming purchase or refinance, you’ll want to know how FHA MIP works.
FHA Mortgage Insurance Gets Doubled Up
The Federal Housing Administration’s role in mortgages is different from the role of Fannie Mae and Freddie Mac. The FHA doesn’t “buy mortgages” from banks like Fannie and Freddie do to create market liquidity. Rather, the agency is an insurer of mortgages.
It works like this : The Federal Housing Administration publishes official mortgage guidelines to which banks can choose to underwrite a mortgage. Mortgages which meet these published guidelines are most commonly called “FHA mortgages”.
For a bank which underwrites an FHA mortgage, should the loan ever go into default, the agency’s function is to repay the bank’s loss, much like a auto insurer would pay a consumer for a loss due to accident.
The Federal Housing Administration pays its claims from a fund called the Mutual Mortgage Insurance (MMI) fund. The fund is funded using two types of mortgage insurance which is paid by the nation’s FHA-insured homeowners.
The two types of FHA MIP are the Upfront Mortgage Insurance Premium (UFMIP) and the annual Mortgage Insurance Premium (MIP). All FHA-insured homeowners pay at least one form of FHA mortgage insurance.
Beginning June 3, 2013, however, because of new FHA guidelines, all new FHA loans will require both forms of MIP, and a large group of FHA-backed homeowners will lose the chance to remove mortgage insurance prior to their loan being paid-in-full.
How Much Are FHA Mortgage Insurance Premiums?
The FHA’s mortgage insurance requirements vary by loan type and loan length.
FHA Upfront Mortgage Insurance Premiums
The FHA’s current upfront mortgage insurance premium (UFMIP) is 1.75 percent of your loan size. For example, if you want to apply for an FHA purchase mortgage and your loan size is $300,000, then your Upfront MIP will be equal to $5,250.
Upfront MIP is not paid as cash. It’s automatically added to your loan balance by the Federal Housing Administration. Therefore, your final loan size in the example above will be grown to $305,250. Furthermore, upfront MIP is not used in your loan-to-value calculation.
You can make a 3.5% downpayment on your purchase, add the UFMIP to your loan size, and still meet the FHA’s minimum downpayment guidelines.
Upfront MIP is paid at closing and paid into the Federal Housing Administration’s Mutual Mortgage Insurance fund. It’s never paid again. This is why it’s called “upfront” MIP. FHA homeowners pay mortgage interest on the upfront MIP for loan’s full term.
FHA Annual Mortgage Insurance Premiums
The Federal Housing Administration’s other type of mortgage insurance is the annual Mortgage Insurance Premiums (MIP). It’s paid in 12 installments annually and included in your monthly mortgage payment.
On a monthly mortgage statement, the annual MIP payment is often shown as “HUD Escrow”, “Risk-Based HUD”, or “Monthly Mortgage Insurance”.
Annual MIP is required on all FHA mortgages. Premiums vary according to your loan traits.
Until April 1, 2013, the MIP schedule for new FHA loans is as follows :
- 15-year loan terms with loan-to-value over 90% : 0.60 percent annual MIP
- 15-year loan terms with loan-t0-value under 90% : 0.35 percent annual MIP
- 30-year loan terms with loan-to-value over 95% : 1.25 percent annual MIP
- 30-year loan terms with loan-to-value under 95% : 1.20 percent annual MIP
There is also a 0.25 percentage point premium for loans which exceed $625,500. Loans of this size are only available in high-cost areas in which the median home price is elevated as compared to national norms.
Such areas include Loudoun County, Virginia; Orange County, California; and Bethesda and Potomac, Maryland. In these locales, Federal Housing Administration-backed loans may be for as much as $729,750. The annual MIP is 1.50 percent.
For now, 15-year FHA mortgages with a loan-to-value of 78% or less are exempt from annual MIP payments. This will change with the second phase of the new FHA mortgage insurance guidelines which go into effect June 3, 2013.
How To Get Rid Of Your FHA Mortgage Insurance
FHA mortgage insurance is not permanent. Eventually, FHA mortgage insurance can go away. The schedule for getting rid of MIP changes by loan term.
For FHA loans endorsed prior to June 3, 2013, the MIP cancelation terms are as follows :
- 30-year loan term : Annual MIP is automatically canceled once the loan reaches 78% loan-to-value and annual MIP has been paid for at least 60 months.
- 15-year loan term : Annual MIP is automatically canceled once the loan reaches 78% loan-to-value. There is no requirement for MIP to be paid for at least 60 months.
Note that the loan-to-value calculation is not based on the current appraised value of the home; it’s based on the FHA’s last known value of the home. In many situations, the last known value is the home’s purchase price.
Using these rules, homeowners with a 30-year fixed rate FHA mortgage must pay mortgage insurance for at least five years before it can go away. Homeowners with a 15-year fixed-rate FHA mortgage can have MIP removed as soon as LTV drops to 78%.
At today’s mortgage rates, a 30-year FHA mortgage on which the minimum 3.5 percent downpayment was made would reach 78% LTV in roughly 10 years. A 15-year fixed would require 26 months.
Again, beginning June 3, 2013, the FHA MIP rules change. Some newer FHA loans will pay annual MIP for the full 30 years.
Compare FHA Mortgage Rates And MIP
FHA mortgage rates are cheap right now; cheaper than conventional loans and cheaper than VA home loan options.
Be sure to understand FHA mortgage insurance premiums, though. Over the long-term, MIP can be costly so it pays to compare home loan options — especially if you’re waiting until after the agency’s MIP changes to lock a mortgage rate.
Starting April 1, 2013, the FHA’s mortgage insurance rules will change. For homeowners trying to cancel MIP or otherwise refinance, after April 1, the stakes are raised. Get moving today, therefore.