FHA Mortgage Insurance Premium (MIP) can cost you up to 1.75% of the loan amount upfront. You also need to pay an annual premium of 0.55% to 1.05% of the loan balance. On a median-priced $486K home, it means an initial $8,500 payment and yearly fees between $2,500 and $5,000.
Despite these costs, FHA loans offer great opportunities for homeownership. In 2024, the FHA increased its loan limits to $498,257 for most areas. Higher-cost regions like New York and California now have limits up to $1,149,825.
FHA is perfect for first-time homebuyers. They offer lower down payments and easier credit requirements than conventional mortgages. To find FHA lenders, consider using platforms like Houzeo.
What Is an FHA Mortgage Insurance Premium (MIP)?
An FHA Mortgage Insurance Premium (MIP) is a fee you pay when you get an FHA loan. FHA loans are mortgages backed by the Federal Housing Administration (FHA) to help make home buying easier for people.
With an FHA loan, you only need to pay 3.5% of the home’s price as a down payment, much lower than the average 20% required for conventional mortgages. If you make a small down payment, the lender faces more risk if you can’t make future mortgage payments.
You can use a mortgage calculator to see how the MIP and down payment will impact your monthly payments. If your down payment exceeds 20%, you won’t have to pay FHA MIP.”
How Much Is FHA Mortgage Insurance?
The FHA MIP has two cost components: an upfront premium and an annual premium. The upfront premium is a one-time fee of 1.75% of the base loan amount. You pay this at closing. For example, if you take a $300,000 loan, the FHA upfront MIP would be $5,250 (1.75% of $300,000).
The annual premium ranges from 0.50% to 0.75% of the loan amount. It depends on your loan-to-value ratio (LTV) and loan term. You pay this yearly fee divided into monthly mortgage insurance FHA installments.
Here’s a table showing the annual FHA MIP rates:
Mortgage Term of More Than 15 Years
| Base Loan Amount | LTV | MIP Annual Fee |
| Less than or equal to $726,200 | ≤90.00% | 0.50% |
| >90.00% but ≤95.00% | 0.50% | |
| >95.00% | 0.55% | |
| Greater than $726,200 | ≤90.00% | 0.70% |
| >90.00% but ≤95.00% | 0.70% | |
| >95.00% | 0.75% |
Mortgage Term of Less Than or Equal to 15 Years
| Base Loan Amount | LTV | MIP Annual Fee |
| Less than or equal to $726,200 | ≤90.00% | 0.15% |
| >90.00% | 0.40% | |
| ≤78.00% | 0.15% | |
| Greater than $726,200 | >78.00% but ≤90.00% | 0.40% |
| >90.00% | 0.65% |
How Long Do You Pay FHA Loan Insurance?
The duration you must pay the annual MIP depends on your FHA loan down payment amount and loan term. Here’s a breakdown:
| Loan Term | Down Payment | Duration of Annual MIP |
| 30 years | Less than 10% | Entire loan term |
| 30 years | 10% or more | 11 years |
| 15 years | Less than 10% | Entire loan term |
| 15 years | 10% or more | 11 years |
How to Calculate FHA MIP?
Let’s say you buy a house for $250,000 with a 10% down payment i.e. $25,000.This results in a loan-to-value (LTV) ratio of 90% (loan amount divided by purchase price).
Therefore, your FHA loan amount would be $225,000 for a 30-year term.
The Upfront Mortgage Insurance Premium (UFMIP) would be $3,937.50 (1.75% of $225,000).
According to the table, the annual Mortgage Insurance Premium (MIP) rate is 0.50% for a 30-year loan with an LTV of 90% or less.
So, the annual MIP would be calculated as follows: $225,000 x 0.5% = $1,125.00.
Can You Avoid or Lower Your FHA MIP?
While FHA home mortgage insurance premiums are required, there are a few ways to avoid or reduce these costs:
1. Increase Your Down Payment to 20%
The simplest way to avoid MIP altogether is to put down 20% or more when buying a home. With a 20% down payment, you eliminate the need to pay mortgage insurance FHA.
2. Down Payment Assistance
Some programs provide down payment assistance to homebuyers. Using this assistance could increase your down payment to 10% or more. At this level, your annual MIP expense would be limited to 11 years instead of the entire loan term.
3. Refinance into a Conventional Loan
Once you have at least 20% equity in your home, you can refinance your loan into a conventional loan. But to qualify for a conventional loan, you need a minimum credit score of around 620. You also need a debt-to-income ratio (DTI) of 50% or less.
4. Look for Other Government Loans
You can also explore the following government-backed loans to avoid FHA MIP:
- USDA Loan: These loans are available for homebuyers in rural areas and don’t require a down payment. You also don’t need to pay a mortgage insurance premium for USDA loans.
- VA Loan: Available for veterans, active-duty service members, and eligible spouses. VA loans don’t require a down payment or monthly mortgage insurance. But you need to pay a one-time VA funding fee.
Bottom Line
An FHA loan presents a great opportunity to buy a home with only a 3.5% down payment. However, you’ll need to pay FHA mortgage insurance premiums to protect the lender.
However, there are ways to avoid the premium fees. You can make a 20% down payment, explore down payment assistance programs, or consider other government-backed options like VA or USDA loans. These alternatives may help you save on insurance costs.
Search for FHA home loans in your county and shop for the most suitable lender.
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Frequently Asked Questions
What is FHA insurance?
FHA insurance is a form of FHA mortgage insurance that protects lenders from losses due to borrower default. It is used by first-time homebuyers and those with lower credit scores or smaller down payments.
What does FHA Mortgage Insurance cover?
FHA Mortgage Insurance covers lenders from financial loss if borrowers default on their mortgages. It allows borrowers to qualify for loans they might otherwise not be able to afford.
Can you get rid of MIP on an FHA loan?
Yes, you can eliminate the annual MIP on an FHA loan by either increasing the down payment to 20%. Another option is to refinance into a conventional mortgage once you have at least 20% equity in your home.
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