Are you a first-time borrower looking for a mortgage loan? With a low down payment?
If so, you may be considering an FHA loan.
But before you apply for this type of mortgage, it’s important to understand the FHA MIP (mortgage insurance premium).
The Federal Housing Administration, or FHA, offers mortgage insurance on loans made by FHA-approved lenders. This insurance protects the lender in case of default by the borrower.
It’s important to understand that FHA mortgage insurance is required on all mortgages with down payments less than 20% of the home’s purchase price.
And, unlike other types of mortgage insurance, the premiums cannot be canceled – even if your loan is paid off early.
Let’s take a closer look at what you need to know about FHA MIP.
What Is an FHA MIP (Mortgage Insurance Premium)?
An FHA mortgage insurance premium (MIP) is a type of insurance that mortgage borrowers in the United States pay for when taking out a loan.
It’s insurance that protects the lender if you default on your mortgage loan.
FHA borrowers are required to pay both an upfront mortgage insurance premium (UFMIP) and an annual MIP.
The UFMIP is a one-time payment made at loan closing, while the annual MIP is paid in monthly installments.
MPI is similar to disability insurance or life insurance, in that it protects the lender if you die or become disabled and are unable to make your mortgage payments.
With other conventional loans, mortgage insurance is typically cancelable once your loan balance reaches 80% of your home’s value.
But with FHA loans, the annual MIP remains for the life of the loan.
The only way to get rid of FHA MIP is to refinance into a conventional loan once you have built up enough equity in your home.
How Does FHA MIP Work?
FHA mortgage insurance premiums are paid by borrowers to the Federal Housing Administration.
This type of insurance protects lenders from losses if a borrower defaults on their mortgage loan.
The FHA does not issue loans or directly insure homeowners. Rather, the insurance protects participating lenders in case of borrower default.
The FHA MIP is calculated based on several factors, including loan amount, loan-to-value ratio (LTV), and term length.
The premium is also affected by your credit score and whether you’re taking out a fixed-rate or adjustable-rate mortgage (ARM).
For most borrowers, the upfront premium is added to their loan balance.
This means you’ll have a higher loan balance to pay off, and your monthly payments will be higher as a result.
Some lenders allow borrowers to finance their upfront MIP, but this often results in a higher interest rate.
The annual premium is paid in monthly installments, along with your regular mortgage payment.
The amount of the premium is divided by 12 and added to your monthly payment.
What Are the Current FHA MIP Rates?
The current FHA MIP rates as of January 2020 are:
Upfront premium (UFMIP): 1.75%
Annual premium:
– for loans with LTV < 90%: 0.80%
– for loans with LTV >=90%: 0.85%
– for loans with terms >=15 years and LTV <= 78%: 0.70%
– for loans with terms >=15 years and LTV > 78%: 0.45%
These rates may vary slightly depending on your lender, but the UFMIP is always 1.75%.
The annual premium is divided into 12 monthly payments and added to your regular mortgage payment.
How Much Does FHA MIP Cost?
The cost of FHA MIP depends on several factors, including loan amount, down payment size, credit score, and whether you’re taking out a fixed-rate or adjustable-rate mortgage.
For example, let’s say you’re taking out a $200,000 loan with a 3.5% down payment.
Your LTV would be 96.5%, and you’d be required to pay an upfront premium of $3,500 (1.75% of the loan amount).
Your annual MIP would be $1,400, or 0.70% of the loan amount.
This would be divided into 12 monthly payments of $116.67, which would be added to your regular mortgage payment.
Over the life of a 30-year loan, you would pay a total of $49,935 in FHA MIP fees.
How To Avoid or Get Rid of FHA MIP?
If you’re not able to avoid paying FHA MIP, the good news is that it’s possible to get rid of it.
You can do this by refinancing into a conventional mortgage loan once you have built up enough equity in your home.
To avoid paying FHA MIP, you’ll need to put down a larger down payment when you take out your loan.
A down payment of 10% or more will allow you to avoid paying mortgage insurance altogether.
You can also avoid paying MIP by taking out a conventional loan instead of an FHA loan.
Conventional loans typically require private mortgage insurance (PMI) if you have less than 20% equity in your home, but they do not have an upfront MIP like FHA loans do.
If you already have an FHA loan, you can refinance into a conventional loan to avoid paying MIP.
You’ll need to have at least 20% equity in your home to qualify for refinancing. Here are the other ways to get rid of MIP on an FHA loan:
Use a Different Lending Program
If you’re not able to put down a larger down payment or sell your home, you may be able to qualify for a different lending program.
The Veterans Affairs (VA) loan program is one option that allows borrowers to finance their entire loan amount without any mortgage insurance.
You can also look into state and local assistance programs.
These programs may offer down payment assistance or help with closing costs, which can make it easier to avoid paying mortgage insurance.
Piggyback Loan
Another option is to take out a piggyback loan. This is a second mortgage that you can use to finance part of your down payment.
The most common type of piggyback loan is an 80/10/10 loan, which finances 80% of the purchase price with the first mortgage, 10% with the second mortgage, and 10% with a down payment.
Piggyback loans can help you avoid paying private mortgage insurance (PMI) on the first loan, but you will still be required to pay mortgage insurance on the second loan.
Lender-Paid Mortgage Insurance (LPMI) Loan
If you’re not able to put down a 20% down payment, you may be able to qualify for a lender-paid mortgage insurance (LPMI) loan.
These loans do not require borrowers to pay mortgage insurance, but they typically have higher interest rates than loans that do require mortgage insurance.
Before you decide on a loan, be sure to compare the interest rate and monthly payment to see if it’s right for you.
FHA Mortgage Insurance vs Private Mortgage Insurance (PMI)
The difference between FHA MIP and PMI is that FHA MIP is an insurance policy that is required by the government, while PMI is an insurance policy that is required by the lender.
FHA MIP is paid by the borrower and protects the lender from loss, while PMI is paid by the lender and protects the lender from loss.
FHA MIP is a type of mortgage insurance that is required by the Federal Housing Administration (FHA).
FHA loans are insured by the FHA, which means that if the borrower defaults on the loan, the lender will not be able to recover its losses.
FHA MIP is required for all FHA loans, while PMI is only required for some conventional loans.
FHA MIP is paid by the borrower and can be paid upfront or monthly. PMI is also paid by the borrower but can be paid upfront, monthly, or both.
FHA MIP is required for the life of the loan, while PMI is typically only required for loans with a loan-to-value ratio (LTV) of less than 80%.
FHA MIP is typically more expensive than PMI.
Pros and Cons of FHA Mortgage Insurance Premium
FHA Mortgage Insurance has its pros and cons so it’s better to know about it before making a decision.
Some of the PROS of FHA Mortgage Insurance are:
Premiums Don’t Fluctuate
Your monthly mortgage insurance premium will never increase and could potentially decrease if your home value increases.
It’s Easy to Qualify
FHA loans have more lenient credit standards and down payment requirements than conventional loans.
It’s Possible to Cancel
You may be able to cancel FHA mortgage insurance if your home value increases or you make extra payments on your loan.
Low Downpayment
FHA loans allow for a lower down payment than conventional loans.
Some of the cons of FHA Mortgage Insurance are:
It’s Expensive
FHA mortgage insurance is more expensive than private mortgage insurance for a conventional loan.
It’s Required for the Life of the Loan
FHA mortgage insurance is required for the life of the loan, even if you make extra payments to bring your loan balance below 78% of the home’s value.
It Reduces Your Mortgage Interest Deduction
FHA mortgage insurance reduces your mortgage interest deduction because it is paid as part of your loan.
You Might Pay More Over Time
If you plan to stay in your home for a long time, you might end up paying more for your home with an FHA loan than you would with a conventional loan.
Is FHA MIP Tax-deducible?
Recently, legislation was approved to make FHA mortgage insurance premiums paid on FHA-insured loans tax-deductible.
Purchase and refinance transactions completed between 2007 and 2010 may be deductible.
To find out if they qualify for the mortgage insurance tax deduction, homeowners should contact the IRS or their tax preparer.
Always speak with your tax preparer or the Internal Revenue Service before attempting to claim new deductions to ensure that you have a complete understanding of how to file and the potential tax consequences of claiming the new deductions.
In some cases, you may be required to file an updated return or complete other IRS documentation to claim your deductions; your tax professional will be able to provide you with the most accurate information regarding your circumstances.
Is FHA MIP Worth it?
The answer to this question depends on your circumstances.
If you are looking for a low downpayment loan with lenient credit requirements, an FHA loan might be a good option for you.
However, if you are looking for the lowest possible monthly payment, you might want to consider a conventional loan.
It’s important to compare the interest rate, monthly payment, and terms of the loan before making a decision.
You can use our mortgage calculator to estimate your monthly payments and compare loans.
When you’re ready to apply for a loan, be sure to shop around and compare offers from multiple lenders to get the best deal.
Conclusion
The FHA MIP is an important part of the Federal Housing Administration’s mortgage insurance program.
Borrowers who are considering an FHA-insured loan should understand the associated costs and benefits to make an informed decision.
Although the upfront MIP cost can seem prohibitive, it is important to remember that it is usually financed into the loan and does not need to be paid out-of-pocket.
Borrowers who default on their loan will still be responsible for paying the MIP, even if they go through a foreclosure.
Overall, the FHA MIP is an important part of the FHA mortgage insurance program that helps to make homeownership possible for many borrowers who would not otherwise qualify.
Borrowers should understand the associated costs and benefits before taking out an FHA-insured loan.
Sources:
https://www.bankrate.com/mortgages/fha-mortgage-insurance-guide/
https://www.fha.com/fha_article?id=265