The “monthly payment breakdown” itemizes what goes into your total FHA loan payment — also known as a PITI (principal, interest, taxes and insurance) payment. Here’s a detailed breakdown of each cost:
Principal and interest
This part of your monthly payment varies based on your FHA base loan amount, interest rate and loan term. For a fixed-rate loan, your total payment amount doesn’t ever change, but each month, you’ll pay more principal
The principal is the actual loan amount you’re borrowing. If you buy a $300,000 home and put down $50,000, your principal balance is $250,000.
and less interest
Interest is the cost of borrowing money, expressed as a percentage of your loan amount that you pay to your lender each year.
until you pay off the balance. This process is known as amortization.
Property taxes
FHA loans require you to pay a portion of your property taxes as part of your monthly payment. The lender divides your annual tax bill into 12 monthly installments and collects them in an escrow account until they’re due.
Home insurance
Homeowners insurance pays for losses from unexpected damage to your home from a fire, theft or other covered event. Like your property taxes, the premium is divided by 12 and becomes part of your monthly mortgage payment. The lender pays the annual premium through your escrow account.
Monthly FHA mortgage insurance premium (MIP)
The annual mortgage insurance premium (MIP) is one of two types of FHA mortgage insurance you’re required to pay. The fee ranges from 0.15% to 0.75% of your loan amount, depending on the loan term, loan amount and down payment. MIP is charged annually, divided by 12 and added to your monthly payment.
- Make a bigger down payment. The annual MIP premium is cheaper with a larger down payment, since you’re borrowing less.
- Boost your credit scores. FHA lenders offer rates based on your credit score, and a higher score gets you a lower rate and mortgage payment. In the months before you apply for a loan, pay your bills on time, keep your credit card balances low and avoid opening multiple new credit accounts at once.
- Choose a streamline refinance if rates drop. The FHA streamline refinance allows you to lower your FHA loan rate without a home appraisal or proof of income. If rates fall, consider refinancing your mortgage to shrink your monthly payment.