If you take out an FHA loan, you’ll pay mortgage insurance for the life of the loan. The mortgage insurance protects your lender should you default on the loan. It’s in exchange for the low down payment requirements and flexible underwriting requirements the FHA offers.
Just how much does the FHA MIP affect your mortgage payment? We take a look below.
Upfront Mortgage Insurance
First, you should know that you’ll pay mortgage insurance upfront. This doesn’t affect your mortgage payment, but it does affect the amount of cash’s you need to close the loan. The upfront MIP fee is 1.75% of the loan amount.
If you have a $150,000 loan, you’d pay $2,625 in mortgage insurance at the start of the loan. Some lenders allow you to wrap this cost into the loan if you don’t have the cash to pay it upfront. If you do that, though, just know that you are increasing your loan amount. This then increases your mortgage payment and the amount of interest you pay on the loan.
Annual Mortgage Insurance
The annual mortgage insurance is the insurance you pay monthly. The lender pays the premium on your behalf once a year, but they charge you 1/12th of the total on a monthly basis. This then gets added to your mortgage payment, which already includes the principal, interest, taxes, and insurance.
The charge for the annual MIP on an FHA loan is 0.80% of your loan amount. The amount you must pay is figured on the average outstanding balance of your loan for the next 12 months. Your amortization table is used to figure out your average outstanding balance.
The annual mortgage insurance will decrease slightly each year as you pay your principal balance down. If you make extra payments towards the principal, it may knock down the FHA MIP even further. Just know that you will pay the mortgage insurance as long as you hold the FHA loan. It doesn’t matter if you owe less than 80% of the home’s value. FHA MIP lasts for the entire loan term.
On a $150,000 loan, you’d pay an additional $100 each month for the first twelve months. Let’s say you get the balance down to $125,000 after a few years. You would then pay $83 for the mortgage insurance. The premium will continue to decline as you make your payments.
Getting Out of FHA MIP
The only way to get out of paying the monthly FHA MIP is to refinance your loan. Many people use the FHA loan to be able to buy the home they want. They can get the loan with just 3.5% down on the home and with flexible underwriting guidelines.
As they pay the balance down and the home appreciates, borrowers use this opportunity to make sure their credit is in good shape and that their debt ratio is low. They then refinance out of the FHA loan into a conventional loan. As long as you owe less than 80% of your home’s value, you won’t have to pay PMI, which helps your mortgage payment decrease.
The FHA MIP does help borrowers with less than perfect credit and little money to put down on a home get the loan they need. It’s a great program that offers flexibility so that you can buy the home you want.