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What is FHA Mortgage Insurance and How Much Does It Cost?

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FHA loans are backed by the Federal Housing Administration, a subsidiary of the U.S. Department of Housing and Urban Development (HUD). Because FHA-approved lenders take on more risk — due to lower credit score and down payment requirements — borrowers are responsible for paying FHA mortgage insurance.

FHA borrowers have to pay two types of mortgage insurance premiums: upfront and annual. The upfront mortgage insurance premium (UFMIP) is charged at your mortgage closing when you first get your loan, while the annual premium is an ongoing obligation you pay yearly. These mortgage insurance premiums (MIP) protect the lender in the event of a mortgage default. In many cases, you’re responsible for FHA MIP for the life of your loan.

How much is FHA mortgage insurance?

The upfront mortgage insurance premium costs 1.75% of your loan amount and is due at closing. If you’re borrowing $250,000, for example, your upfront MIP will be $4,375 ($250,000 x 1.75% = $4,375).

The 1.75% UFMIP applies to most FHA loans, no matter the loan amount or term, except for the following:

  • Streamline refinances and some simple refinances (0.01% UFMIP)
  • Hawaiian home lands (2.344% to 3.80% UFMIP, depending on the loan term)
  • Indian lands

FHA MIP chart for loan terms longer than 15 years

Loan amount  LTV ratio  MIP How long?
Less than or equal to 
$625,500 
≤ 90% 0.80% 11 years
> 90%, but ≤ 95% 0.80% Life of loan
> 95% 0.85% Life of loan
More than $625,500  ≤ 90% 1.00% 11 years
> 90%, but ≤ 95% 1.00% Life of loan
> 95% 1.05% Life of loan

FHA MIP chart for loan terms less than or equal to 15 years

Loan amount  LTV ratio  MIP How long?
Less than or equal to 

$625,500 

≤ 90% 0.45% 11 years
> 90% 0.70% Life of loan
More than $625,500  ≤ 78% 0.45% 11 years
> 78%, but ≤ 90% 0.70% 11 years
> 90% 0.95% Life of loan

Source: U.S. Department of Housing and Urban Development

The ongoing annual mortgage insurance premium ranges from 0.45% to 1.05%, is divided by 12 and paid as an addition to your monthly mortgage payment. How much you’ll pay depends on your loan-to-value (LTV) ratio and repayment term.

FHA MIP vs. PMI

Mortgage insurance premiums apply to FHA loans specifically, but conventional loans come with a similar requirement, called private mortgage insurance (PMI).

Similar to FHA mortgage insurance, the purpose of PMI is to protect the lender if you fail to maintain your monthly mortgage payments. Unlike FHA MIP, there’s no upfront premium, though you may have the option to pay PMI in a lump sum at closing.

Conventional borrowers must pay PMI when they make a down payment of less than 20%. Your credit score and LTV ratio determine your PMI cost, but the price range may fall somewhere between $30 and $70 per month for each $100,000 you borrow for your home purchase.

As previously mentioned, in many cases, FHA mortgage insurance premiums are in place for the life of your loan. On the other hand, you can get rid of PMI after you build 20% equity in your home.

How to get rid of FHA mortgage insurance

One of the main ways to get rid of FHA MIP is to make at least a 10% down payment at closing. You’ll still pay the premiums, but just for 11 years.

Another way to get an FHA MIP removal it is to refinance into a conventional loan — however, there are several things you’ll need to do to prepare for a refi, including:

  • Having a credit history that’s free from any blemishes that could stop you from qualifying for a refinance
  • Improving your credit score to 620 or higher
  • Building at least 20% home equity (otherwise, you’ll pay for PMI after refinancing)

Still, FHA mortgage insurance may not bother you much if you’re a first-time homebuyer. The benefit of making a small down payment and achieving homeownership sooner — rather than saving up for a 20% down payment — may outweigh the disadvantage of carrying this extra loan cost.

 

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