818 Mortgage Home Loan Specialist

FHA Mortgage Insurance Premium (MIP)

818 Mortgage Blog - 2023

FHA Mortgage Insurance Premium (MIP)

I had a realtor call me today asking about the viability of an FHA loan. After explaining to her some of the nuances of an FHA loan, I thought it'd be a good idea to write this article.

An FHA loan could be the right choice for you if you have a lower credit score or a smaller down payment. FHA loans are backed by the Federal Housing Administration and, because of this, can help you buy a home with a credit score in the 500s and a down payment as low as 3.5%.

FYI - For a conventional loan, the minimum credit score is 620.

FHA loans do require you to pay a mortgage insurance premium (MIP). This MIP is an additional payment you make to secure the loan.

How Much Does FHA Mortgage Insurance Premium Cost?

FHA MIP involves two payments: 1) an upfront premium and 2) an additional annual payment. Both of these payments depend on your loan amount.

1) MIP will be equal to 1.75% of the total value of your loan. For example, if you borrow $500,000 for your mortgage, your upfront payment will be $8,750. This upfront MIP is due at closing or it can be added to the balance of the loan.

2) Annual mortgage insurance varies depending on loan-to-value ratio (LTV).

Typically, FHA annual MIP is added to the loan and, as such, your monthly mortgage payment.

30 Year Mortgage

Here’s what you can expect to pay if you have a 30 year loan term. For example:

Borrow less than or equal to $726,200 for your home purchase, and you have a down payment of 5% or more. You’ll pay 0.50% each year. On a $500,000 home loan, that’s $2,500 per year or $208.34 per month.

Borrow less than or equal to $726,200 for your home purchase, and you have a down payment of less than 5%. You’ll pay 0.55% each year. On a $500,000 home loan, that’s $2,750 per year or $229.17 per month.

Borrow more than $726,200 for your home purchase, and you have a down payment of 5% or more. You’ll pay 0.70% each year. On a $900,000 home loan, that’s $6,300 per year, or about $525 per month.

Borrow more than $726,200 for your home purchase, and you have a down payment of less than 5%. You’ll pay .75% each year. On a $900,000 home loan, that’s $6,750 per year, or about $562.50 per month.

How Long Do You Pay for FHA Mortgage Insurance?

Long ago, FHA MIP was similar to the private mortgage insurance (PMI on a conventional loan). In a conventional mortgage, PMI automatically cancels when you own around 20%.

Today, FHA no longer cancels your MIP. Instead, if you put down 10% or more, you’ll pay MIP for 11 years. If put less than 10% down, you’ll pay MIP for the entire life of the loan.

Can You Avoid FHA Mortgage Insurance?

No, you cannot avoid paying MIP when you take out an FHA loan. However, many buyers can refinance and switch from an FHA loan into a conventional mortgage. Depending on your equity, this may reduce or cancel your mortgage insurance.

Refinance to a Conventional Loan

Many homeowners in an FHA loan will decide to refinance to a conventional loan when they reach 20% equity to stop paying MIP. Even if you have not reached 20% equity, it may be beneficial to switch to a conventional loan so that you can shop for less expensive private mortgage insurance (PMI).

Refinancing into a conventional loan will require you meet your minimum requirements. Conventional loans do have stricter requirements than FHA loans. To qualify for a conventional loan, you’ll need at least the following:

A higher credit score: You must have a median FICO® Score of at least 620.

Debt-to-income ratio: Your DTI ratio must be less than 50% to qualify.

Home equity: If you refinance before you have 20% equity, you will need to pay for PMI instead of MIP. PMI can be less expensive than MIP.

The Bottom Line

FHA loans require an upfront mortgage insurance premium and a mortgage insurance premium. The amount you will pay depends on your loan and your down payment.

You cannot cancel MIP payments on an FHA loan. But, those put at least 10% down will only need to pay MIP for 11 years. If you put less than 10% down, you will pay MIP for the entire life of your loan.

Now that you’re informed, you’re ready to apply for your mortgage or a refinance. Call Marcel at 818 Mortgage today so that he can help you.