FHA MIP Chart
The Federal Housing Administration was created to help first-time homebuyers. The FHA will insure a mortgage in the event a borrower defaults on a loan the lender is reimbursed.
This makes FHA-insured mortgage loans much less risky and allows lenders to lower their minimum requirements.
In order to fund the FHA loan program, they charge a mortgage insurance premium.
What is an FHA Mortgage Insurance Premium?
MIP is short for Mortgage insurance premiums. The Federal Housing Administration requires all FHA mortgages to have MIP regardless of how much money is used as a down payment.
FHA MIP is an insurance policy for your mortgage loan in case you ever default on the loan.
You may also hear the term PMI, short for private mortgage insurance.
Mortgage insurance is not a bad thing because it’s the reason FHA loans even exist in the first place.
Having mortgage insurance reduces the risk to the lender, allowing them to reduce their requirements, helping more people to qualify.
There are two kinds of premium mortgage insurance you will be required to pay when using an FHA-insured mortgage. Up-front mortgage insurance and annual mortgage insurance.
Upfront FHA Mortgage Insurance
The upfront mortgage insurance premium is collected at the time you close or rolled into your loan amount.
The upfront premium is 1.75 basis points (1.75&) of the loan amount and is rolled into your loan. If you refinance your FHA mortgage within the three years of closing, you will receive a refund for the unused upfront MIP.
Annual FHA Mortgage Insurance
The annual premium is divided into 12 monthly payments and is included in your mortgage payment. MIP is required for all FHA loans.
Effective in 2015, you can no longer cancel the MIP after the LTV reaches 78% or less. You must carry MIP for the life of the loan.
You will pay an annual mortgage insurance premium between .80 and .85 basis points depending on the loan-to-value ratio of your loan.
This is actually a great deal, the FHA mortgage insurance premium used to be over 1%. However, it was recently lowered per Mortgagee Letter 2015-01.
Mortgages used to require a large downpayment and a great credit score. Many consumers couldn’t qualify; that was before the Federal Housing Administration was created to help increase homeownership in America.
The FHA does not issue the loans. They insure them in case a borrower defaults on the mortgage loan. This makes FHA lending less risky for lenders, allowing them to lower their minimum requirements.
FHA loans are easier for first-time homebuyers to qualify for because of the low credit and down payment requirements.
How to get rid of MIP on an FHA Home Loan
As long as you got your FHA-insured mortgage between Dec. 31st, 2000, and July 3rd, 2013, and you have paid the LTV (loan to value) of the mortgage to 78% or less.
Contact your lender and ask them if you’re eligible to have your annual insurance premium removed.
If you received your FHA loan after July 3rd, 2013, and put less than 10% as a down payment, you will have to pay the MIP for the life of the loan.
You can remove PMI after 11 years if you put more than 10% down. The FHA no longer allows borrowers to cancel FHA MIP after the LTV has reached 78%.
You can still avoid paying mortgage insurance after you have paid down your loan-to-value to 80% or less, such as refinancing your FHA loan to a conventional loan.
How much is mortgage insurance
As you can see in the FHA MIP chart above, borrowers who put down 5% or less the PMI is .85%. If a borrower puts down more than 5%, then the MIP goes down slightly to .80%.
For example, if you buy a $200,000 home and put a 3.5% downpayment.
The LTV is 96.5%, so you have to pay a PMI of .85%, which is roughly $1700 per year. You can figure the amount you will have to pay for mortgage insurance using the FHA MIP chart below.
Just Want To Cancel Your FHA Mortgage Insurance?
For borrowers who acquired an FHA loan on or before July 3, 2013, the MIP will automatically drop off once the loan-to-value has reached 78%.
If you put a 3.5% downpayment on your home, you will reach 78% LTV in approximately 11 years. You could just wait it out, or add extra money each month to pay the principal balance down quicker.
Another option for an FHA borrower is to refinance their FHA loan into a conventional loan. Prior to July 3rd, 2013, home prices were much lower than they are today.
Example: A $200,000 home that was purchased in early 2013 may be worth $250,000 today. The point is you have more equity, the more your home goes up in value.
How to refinance an FHA loan
Refinancing your home is possible with an FHA lender, your current lender can help you refinance. Although, you may get a better deal from a new lender.
You can choose to do an FHA streamline refinance with an FHA lender, or a conventional refinance.
Refinance out of FHA into a conventional loan to drop PMI
FHA home loans are great, but you’ll be stuck paying mortgage insurance forever. Once the loan-to-value ratio drops below 78%, you can refinance into a conventional loan and not have to pay an annual insurance premium.
Conventional loans require a 620 credit score. If your credit history is poor, you should work on improving your FICO score so you can qualify to refinance.
How long does FHA MIP last?
Borrowers who closed on their FHA loan prior to July 3, 2013, PMI will cancel once your LTV is 78 percent or lower.
If you got your FHA loan after July 3rd, 2013, and the Loan-to-Value was more than 90 percent, you would pay FHA PMI for the life of the loan. If the LTV is under 90 percent, your PMI will cancel after 11 years.
Although anyone can refinance their FHA loan to a conventional loan to save money, additionally, if you use an FHA streamline refinance within the first three years, you can get a portion of the MIP you paid refunded.
How to avoid paying Mortgage Insurance?
You can avoid paying PMI by getting a conventional loan and putting 20% as a downpayment. This is the ideal scenario, however, most people do not have that kind of cash lying around.
Another option is a piggyback 80-10-10 loan. This is where you put 10% down, get a loan for 80% of the purchase price, and get a 10% second mortgage loan, which would allow you to avoid paying PMI.
Some lenders offer an 80-15-5 piggyback loan. In which you need a 5% downpayment and would receive a loan for 80% of the price of the home, and another for 15%.
If you’re a veteran, you can get a VA loan which not only doesn’t require any mortgage insurance. It doesn’t require a downpayment either.
If you live in a rural area, you can get a USDA loan that has cheaper mortgage insurance rates than FHA loans do. On a $250,000 loan, mortgage insurance on a USDA loan is $100 less a month than FHA loans.
Mortgage insurance will be required on most mortgages except for VA loans and conforming loans with an LTV of 80% or less. FHA PMI rules changed in 2013 no longer canceling PMI after the LTV reaches 78%. If you put less than 10% down on an FHA loan, you will have to pay MIP for the life of the loan.
HUD Suspends FHA Mortgage Insurance Premium Cut
Hours after Trump was inaugurated into office. He issued an order that will immediately suspend the FHA mortgage insurance premium cut proposed just weeks earlier.
On January 9th Barack Obama authorized the reduction. Millions of homeowners, we’re going to see a reduction in FHA MIP fees that would save the average FHA homeowner $500 per year.
Borrowers who are able to put a downpayment over 10% on an FHA loan with pay PMI for 11 years on a 30 yr fixed mortgage.
There may be other options for removing PMI if you have paid your loan to under 80% LTV. Speak with a couple of different lenders to compare refinance offers and get some feedback on your options.
Randall has over 15 years of experience in the mortgage and credit industries. He spends a chunk of time helping consumers understand their credit, advise them on how to increase their credit, and lending his mortgage expertise to help them find the right type of loan. Randall lives in Dallas, Texas with his two sons.