A guide to FHA mortgage insurance premiums (MIPs)

Quick insights

• FHA loans require mortgage insurance premium (MIP) to protect lenders against defaults.
• MIP for FHA loans involves an upfront payment and an annual premium, potentially for the life of the loan.
• FHA mortgage insurance is not required for the entire loan if the borrower puts 10% down on a home purchase or refinances.

FHA loans, backed by the Federal Housing Administration, are often attractive to borrowers thanks to more lenient financial requirements. However, FHA loans require homebuyers to pay a mortgage insurance premium (MIP).

If you’re exploring your mortgage options, it’s important to understand how FHA mortgage insurance premiums affect your total costs.

What is an FHA mortgage insurance premium (MIP)?

MIP is a type of insurance that’s paid on FHA loans, regardless of your credit score. Essentially, MIP equates to additional fees FHA loan borrowers pay. Homeowners with an FHA loan pay MIP upfront and in monthly installments that can last the life of the loan.

FHA MIP isn’t designed to protect the borrower. Instead, the fees are intended to protect the lender against the risk of default by the borrower. Since FHA loans allow borrowers with lower credit scores and smaller down payments to take out a home loan, this increases the risk of default for lenders. If an FHA borrower defaults, the MIP helps lenders mitigate the costs.

MIP vs. PMI

FHA loans require an upfront MIP. Depending on how much you put down, you might also owe a monthly MIP. There’s no upfront fee for private mortgage insurance (PMI), but if you put less than 20% down on a conventional loan, you’ll be required to pay it monthly.ec-consumerfinance-what-is-mortgage-insurance The concept of PMI is similar to MIP. PMI protects your lender if you stop making mortgage payments.

While MIP is sometimes called FHA PMI, it’s different because borrowers can remove PMI when they pay down their loan balance to 80% of the home’s purchase price. In contrast, the monthly MIP will either continue for 11 years or the life of the loan, depending on your down payment.ec-consumerfinance-what-is-private-mortgage-insurance

How much is an FHA mortgage insurance premium?

Your FHA loan mortgage insurance premium involves an upfront payment and an annual premium payment. Take a closer look at both types of FHA insurance below.

Upfront FHA MIP

The upfront mortgage insurance premium payment equals 1.75% of your loan’s total value.ec-hud-gov-mortgage-insurance-premiums For example, if you borrow $200,000 for a home purchase, your upfront MIP payment would be $3,500. This payment is calculated from the base loan amount, not the purchase price of the home.

In most cases, the upfront FHA MIP is financed into your loan balance. If you roll the fee into your loan balance, you’ll pay interest on the cost.

Annual FHA MIP

In addition to an upfront MIP, FHA loan borrowers must pay an annual FHA MIP. The exact cost of your annual FHA MIP varies based on your loan amount, loan term, size of your down payment and loan-to-value (LTV) ratio. Generally, you’ll pay your annual MIP on an FHA loan through installments added to your monthly mortgage payment over the loan term. The annual mortgage insurance premiums are typically held in an escrow account by the U.S. Department of Housing and Urban Development (HUD).ec-difi-mip-mortgage-insurance

How long do you have to pay for FHA loan insurance?

Here’s a look at what to expect for your annual FHA MIP for loan terms:

• If your LTV is 90% or lower, you pay for 11 years.
• If your LTV is greater than 90%, you pay for the full mortgage term.ec-fha-requirements-mortgage-insurance

Refinance into a conventional loan

Refinancing from an FHA loan into a conventional loan offers another way to eliminate MIP. When you accrue 20% equity in your home, refinancing into a conventional loan means you’ll no longer need to pay MIP or PMI.

In summary

An FHA loan might open the door to homeownership for you. However, the extra costs of both an upfront MIP and an annual MIP can add up quickly. You can avoid paying MIP for the entire loan term by putting down at least 10% or refinancing into a conventional loan.

If you’re ready to purchase a home, consider speaking to a Home Lending Advisor.