The hard truth of home buying is that when you spend less in one category, you often end up spending more in another to make up for it. Think of it as homeownership homeostasis – if you buy a cheaper home, you might spend more on maintenance and repairs; if you try to save on closing costs by rolling them into your loan, you end up with higher monthly payments; if you get a low down payment mortgage, you’ll have to pay for mortgage insurance.
On FHA mortgages, mortgage insurance is compulsory for all loans. The mortgage insurance you’ll pay on an FHA loan is referred to as a mortgage insurance premium (MIP). How much you’ll pay and for how long depends on your loan amount, mortgage term and down payment size.
Mortgage Insurance Premiums, Defined
MIP is an insurance policy required on all FHA loans. Borrowers must pay upfront MIP (UFMIP) at closing and will also have their annual premium added to their monthly mortgage payments.
UFMIP is equal to 1.75% of the loan amount. Annual premiums can range between 0.45 – 1.05% of the loan amount, depending on how much you borrow, how much you put down and your loan term. The one exception to this is if you’re doing an FHA Streamline refinance on a loan that was endorsed prior to June 1, 2009. We’ll get more into all this in a minute.
On a conventional mortgage, mortgage insurance is referred to as private mortgage insurance (PMI). Borrowers with a conventional mortgage will pay PMI if they make a down payment less than 20%. This differs from FHA loans, on which you’ll pay mortgage insurance regardless of the size of your down payment.
What’s the purpose of mortgage insurance? Mortgage insurance helps offset the lender’s risk when a borrower makes a low down payment, as lower down payments increase the amount of money your lender loses if you default (lower down payment = bigger loan). MIP and PMI insure the lender from this loss.
What Mortgage Insurance Premium Isn’t
Keep in mind that although you’re paying for insurance, that insurance doesn’t protect you.
MIP or PMI shouldn’t be confused with mortgage protection insurance (MPI). Out of these three types of insurance, MPI is the only policy that benefits the homeowner.
In the event of the borrower’s death, MPI will pay off the loan so that the remaining household members don’t have to worry about either taking over the mortgage or losing the house. Because of this, MPI is actually considered to be a type of life insurance.
MIP and PMI only benefit the lender, even though borrowers pay the premiums.
How To Calculate Your Mortgage Insurance Premium
All FHA mortgage borrowers – with one exception – will pay 1.75% of the loan amount in UFMIP. This is due at closing, though this cost can be financed, meaning your UFMIP will be included in your loan amount and you won’t have to bring this cash to the closing table.
The exception to this is borrowers who are doing a Streamline refinance on an FHA loan that was endorsed prior to June 1, 2009. These borrowers will pay an UFMIP that’s 0.01% of the loan amount. Additionally, their annual MIP will amount to 0.55% of the loan.
If you’re wondering if this exception applies to you, know that your endorsement date isn’t the same as your closing date. Endorsement typically happens shortly after closing. If you aren’t sure what your endorsement date is, you’ll need to contact the FHA.
If you aren’t in this group, how much you’ll pay for your annual mortgage insurance on your FHA loan will depend on a few different factors.
Your annual premium will be divided evenly across each of your monthly mortgage payments.
Say, for example, you’re getting a 30-year FHA loan for $200,000 and you make a down payment of 3.5%. In this scenario, your annual MIP rate would end up being 0.85% of your loan amount, or $1,700 per year. That means that each month, about $142 of your mortgage payment will go toward this annual premium.
Mortgage Insurance Premium FAQs
Let’s take a look at some commonly asked questions about MIP.
Are There Ways To Avoid MIPs?
FHA loans are often seen as a good option for borrowers with less money saved up as they allow down payments as low as 3.5%. However, because of this, it’s impossible to avoid MIP on an FHA loan.
If you have enough cash saved up to make a 20% down payment, applying for a conventional mortgage might be a better option for you. When you make a 20% down payment on a conventional loan, you won’t have to pay for mortgage insurance. Additionally, if you put down less than 20%, you’ll be able to have PMI removed when you reach 20% equity in your home, which isn’t usually the case for MIP on FHA loans.
How Long Do MIP Payments Continue?
In some cases, you may be able to have MIP removed. However, many FHA borrowers will pay MIP for the life of their loans.
- If you made a down payment of 10% or more, you may be able to have MIP removed after 11 years of making payments.
- If you received your loan prior to June 3, 2013, you may qualify for cancellation if you’ve reached 22% equity in your home.
If you have at least 20% equity in your home but aren’t eligible to have MIP removed, your best option may be to refinance into a conventional loan – as long as that makes sense for your current financial situation. When you refinance into a conventional loan and keep at least 20% equity in your home, you won’t be required to purchase mortgage insurance.
If you want to know more about MIP on your Quicken Loans® mortgage, you can speak with one of our Home Loan Experts.
Summary: MIPs Are A Fact Of Life For FHA Loans
Though MIP can increase your monthly mortgage payments, it can also help make homeownership more accessible to those who can’t afford some of the high upfront costs that come with it.
If you’re considering an FHA loan, it’s important to consider all the costs that’ll come with that loan. You may decide that MIP is worth being able to keep your down payment affordable, or you may prefer to wait and save your money so you can afford an insurance-free loan. It all depends on what makes the most sense for you.
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