FHA mortgages always include mortgage insurance. It’s not just until you owe less than 80% of the home’s value either. You pay the mortgage insurance for the life of the loan. While that’s not the best news you want to hear, the good news is that the insurance does decrease over time.
Keep reading to learn how mortgage insurance affects your payment today as well as throughout the life of the loan.
Upfront Mortgage Insurance Doesn’t Affect Your Payment
The first type of mortgage insurance you’ll pay is the upfront mortgage insurance. This insurance shouldn’t affect your mortgage payment unless you wrap it into your loan amount. Technically, the upfront mortgage insurance is due at the onset of the loan, so at the closing. Some borrowers are able to wrap the cost into their loan if they bid less on the home than it’s actually worth. If that’s the case, it will increase your loan amount accordingly.
Upfront mortgage insurance is equal to 1.75% of your mortgage amount. You only pay this fee one time. If you refinance, though, you’ll pay it again or any time that you take out another FHA loan.
Annual Mortgage Insurance Affects Your Payment
What does affect your mortgage payment is the annual mortgage insurance. Right now, it equals 0.85% of your loan amount. You pay this insurance every year, but it decreases accordingly with your principal loan balance. In other words, you need less insurance as you pay the balance of your mortgage down.
The annual mortgage insurance protects the lender should you default on the loan. Unfortunately, you don’t benefit from the insurance at all. But it is the reason that you are able to borrow up to 97.5% of the home’s value with only a 580 credit score and as much as a 41% total debt ratio.
The lender will pay the annual mortgage insurance on your behalf. But they will charge you monthly for it. In other words, you pay 1/12th of the full amount due each year monthly. That’s how it affects your mortgage payment. For example, let’s say you borrowed $200,000 on an FHA loan. You would pay $1,700 per year or $141.67 per month for the first year.
The next year, your lender will receive a bill for the premium based on the average outstanding balance of your loan. Let’s say it goes down to $190,000 because you made extra payments towards your principal throughout the year. Your mortgage insurance premium would decrease to $1,615 per year or $134 per month.
As you continue to pay your mortgage balance down, the mortgage insurance premium will continue to decrease. While you’ll never not owe money for MIP, it will decrease over time, making your mortgage payment lower every year.
FHA mortgage insurance premium might seem excessive at first, but with its decreasing amounts, you should be able to make it manageable after just a few years. Eventually, you’ll get used to paying the premium. If you don’t refinance, you won’t have to worry about starting from scratch again.