Understanding the FHA Mortgage Insurance Premium (MIP)

* Disclaimer – all information in this article is accurate as of the date this article was written *

The FHA Mortgage Insurance Premium is an important part of every FHA loan.

There are actually two types of Mortgage Insurance Premiums associated with FHA loans:

1.  Up Front Mortgage Insurance Premium (UFMIP) – financed into the total loan amount at the initial time of funding

2.  Monthly Mortgage Insurance Premium – paid monthly along with Principal, Interest, Taxes and Insurance

Conventional loans that are higher than 80% Loan-to-Value also require mortgage insurance, but at a relatively higher rate than FHA Mortgage Insurance Premiums.

Mortgage Insurance is a very important part of every FHA loan since a loan that only requires a 3.5% down payment is generally viewed by lenders as a risky proposition.

Without FHA around to insure the lender against a loss if a default occurs, high LTV loan programs such as FHA would not exist.

Calculating FHA Mortgage Insurance Premiums:

Up Front Mortgage Insurance Premium (UFMIP)

UFMIP varies based on the term of the loan and Loan-to-Value.

For most FHA loans, the UFMIP is equal to 2.25%  of the Base FHA Loan amount (effective April 5, 2010).

For Example:

>> If John purchases a home for $100,000 with 3.5% down, his base FHA loan amount would be $96,500

>> The UFMIP of 2.25% is multiplied by $96,500, equaling $2,171

>> This amount is added to the base loan, for a total FHA loan of $98,671

Monthly Mortgage Insurance (MMI):

  • Equal to .55% of the loan amount divided by 12 – when the Loan-to-Value is greater than 95% and the term is greater than 15 years
  • Equal to .50% of the loan amount divided by 12 – when the Loan-to-Value is less than or equal to 95%, and the term is greater than 15 years
  • Equal to .25% of the loan amount divided by 12 – when the Loan-to-Value is between 80% – 90%, and the term is greater than 15 years
  • No MMI when the loan to value is less than 90% on a 15 year term

The Monthly Mortgage Insurance Premium is not a permanent part of the loan, and it will drop off over time.

For mortgages with terms greater than 15 years, the MMI will be canceled when the Loan-to-Value reaches 78%, as long as the borrower has been making payments for at least 5 years.

For mortgages with terms 15 years or less and a Loan -to-Value loan to value ratios 90% or greater, the MMI will be canceled when the loan to value reaches 78%.  *There is not a 5 year requirement like there is for longer term loans.

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Related Articles – Mortgage Approval Process:

Should I Refinance or Get a HELOC For Home Improvements?

For homeowners who are interested in making certain property improvements without dipping into their savings/investment accounts, you can either opt for a (HELOC) – Home Equity Line of Credit or a refinance.

Things to Consider

When you are deciding which option to choose, you should know what the differences are:

  • Timeline- This is one of the primary factors that has to be taken into account. Even before you look at the interest rates, you will have to consider the timeline or the actual duration that you will be keeping the home. This will decide exactly how many months or years you will need to pay-back the money you have borrowed.

    Are you planning on some home improvements in order to get top dollar on the sale of the house or are you looking to add some extensions to make your home more comfortable and spacious? This is an important question you have to ask yourself as the 2 types of loans will provide you the same result – they will give you the funds you need, but they serve very different purposes.

A HELOC is ideal for short-term goals & has adjustable rates that might change on a monthly basis and you might end up paying a very high interest in one month and a much lower one in another.

  • Costs / Fees- You will also have to know what the closing costs for each loan will be. This is also related to the timeline considerations. A HELOC will generally cost much less than a full refinance.

  • Interest Rate- This is one of the first things that borrowers will look at. Everyone looks for the lowest interest rate possible. But when it comes to home improvements, the interest rate is not always as important as understanding what the risk level of that particular loan is. If you need a loan for the short term- a HELOC will be more suitable even if the interest rate is higher.

Your choice between a HELOC and a full refinance depends of the level of risk you are willing to take over the time frame that you require the money. For more information and to understand whether a HELOC or a full refinance will be suitable for you, contact ResMac Home Loans.