Mortgage insurance is a common feature of low-down-payment loans. Federal Housing Administration mortgages are popular loans that require 3.5 percent down, which helps cash-strapped buyers purchase a home more easily. In exchange for a low down payment, you pay government mortgage insurance each month. Unlike conventional loans, which may allow you to pay off private mortgage insurance in a lump sum, you must make FHA MI installment payments for the life of the loan. MI costs anywhere between .45 percent and 1.05 percent of the loan amount, depending on the loan size and loan term.
Purpose of MI Coverage
Mortgage insurance payments are used to shore up the FHA's reserve funds. The FHA must pay lenders whenever borrowers default. MI ensures that the FHA has the means to reimburse lender claims when loans go bad. Government MI also allows the FHA and its participating lenders to continue offering low-down-payment loans to moderate-income and credit-challenged borrowers. FHA MI serves the same purpose as conventional private mortgage insurance, or PMI, to protect lenders. However, FHA MI costs differ from PMI costs.
Two MI Premiums to Pay
FHA borrowers pay two separate MI premiums: upfront and annual. You pay a one-time Upfront Mortgage Insurance Premium, or UFMIP, at closing, plus an annual MIP for the remainder of the loan repayment term, up to 30 years. Borrowers generally don't pay the UFMIP out of pocket. Instead, the FHA allows you to roll it into the loan amount and pay it off over the life of the loan. The UFMIP equals 1.75 percent of the original loan amount. For example, the UFMIP on a $200,000 FHA loan, which equals $3,500, (200,000x.0175) results in a total loan balance of $203,500.
Annual MIP Varies By Loan
As of the time of publication, original loan amounts less than or equal to $625,500 with 3.5 percent down were subject to annual MIP charges of .85 percent of the original loan amount. This is the most common MIP charge and is based on a 30-year loan term. Higher MIP charges of 1 percent and 1.05 percent applied to 30-year loans greater than $625,500. The lowest MIP charges applied to 15-year loans less than or equal to $625,500. You pay the annual MIP in installments, which increases your monthly payments. For example, a $200,000 FHA loan with an annual MIP of .85 percent has a premium of $1,700, or a monthly MI payment of $141.67. ($200,000x.0085/12)
Quickly Calculate UFMIP and MIP
To quickly estimate the UFMIP cost of an FHA loan, use this rule of thumb: calculate $1,750 for every $100,000 of the original loan amount and $175 for every $10,000.
- For example, a $250,000 FHA loan is subject to a UFMIP fee of $4,375.(($1750x2)+(175x5))
To quickly estimate your annual MIP costs, use this rule of thumb: calculate $850 for every $100,000 and $85 dollars for every $10,000. Then divide by 12 to get the monthly MI payment.
- For example, a $250,000 loan has an annual premium of $2,125. (($850x2)+(85x5)). $2,125 divided by 12 equals $177 per month.