when you buy a home with an fha loan and don’t have at least 20 percent down, mortgage lenders require you to pay an fha mortgage insurance premium, or mip, which protects them of losses if you cannot repay the loan.
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fha loans are attractive to some buyers because they come with lenient credit requirements, low closing costs, and competitive interest rates. however, the additional expense of fha mortgage insurance is a key drawback to this financing avenue.
what is fha mortgage insurance (mip)?
an fha mortgage insurance premium (mip) is an additional fee you pay to protect the lender’s financial interests in the event you default on your fha loan. In most cases, FHA borrowers are required to pay two mortgage insurance premiums: one up front at closing and one annually for as long as you pay off the loan.
By comparison, conventional loans with less than 20 percent down come with private mortgage insurance (pmi), which is billed every year until you have at least 20 percent equity in your home. This is different from FHA mortgage insurance, which does not have the same equity limit.
You may also be able to find mortgage protection insurance (MPI), which is not required for an FHA loan or any other type of mortgage. mpi is similar to life or disability insurance in that it pays your mortgage if you become disabled, lose your job, or die.
how much does fha mortgage insurance cost?
- fha initial mip: 1.75 percent of loan amount
- fha annual mip: varies by size, term, and loan-to-value (ltv) of the loan
- Use a different loan program: This could mean getting a conventional loan with a 20 percent down payment, but there are other options. One option is to take an FHA loan and the accompanying MIP, and then refinance with a non-FHA loan once you’ve built up enough equity in your home.
- Getting a Lender Paid Mortgage Insurance (LPMI) loan: LPMI may be an option if you are unwilling or unable to make a 20 percent down payment. With this type of loan, the lender covers the PMI in exchange for a higher interest rate.
- Explore a Combination Loan: With this type of loan, you make a 10 percent down payment, then take out a second mortgage to add another 10 percent to your down payment. You end up with a full 20 percent down payment, avoiding PMI, but you’ll have to pay off two loans.
- Search for special programs: There are also some programs that allow borrowers to make a low down payment with no PMI. These range from VA loans (for eligible members of the military) to programs directly from major banks and lenders.
- premiums are fixed: fha mortgage insurance premiums do not fluctuate based on credit score.
- Easier to qualify for: FHA mortgage insurance helps borrowers who might not otherwise qualify for a conventional loan. With mip, mortgage lenders can absorb more risk and therefore lend to less creditworthy borrowers.
- lower down payment: With insurance, borrowers with a credit score of 580 or higher can make as little as a 3.5 percent down payment on an fha loan. those with scores between 500 and 579 may score as low as 10 percent.
- increases the total cost of the loan: The initial and annual costs of fha mortgage insurance increase both the total amount of the loan and the monthly payment.
- hard to get rid of: There are usually only a couple of ways to pay for fha mortgage insurance: you can refinance with a conventional loan or pay off your mortgage in full.
fha loans with terms of more than 15 years
fha loans with terms of 15 years or less
fha simple or optimized refinances
Upfront mortgage insurance premiums can and often are financed into the loan amount, explains Peter Boomer, a mortgage executive with PNC Bank. annual premiums are included in the borrower’s monthly mortgage payment.
If you borrow $100,000 and roll over the initial fha mip cost to your loan, your loan amount will increase to $101,750 (an additional 1.75 percent of the loan amount). naturally, that also increases your monthly payment. With a 30-year fixed-rate FHA loan of $101,750 at 4 percent, your monthly mortgage payment (excluding homeowners insurance and property taxes) would be $485, compared to $477 without mip financing.
Add in the annual premiums as well, and your monthly payment will increase even more, adding another $72 per month, bringing the total to $557. that’s assuming you make a minimum down payment of 3.5 percent, in which case you’ll be charged an annual mip rate of 0.85 percent.
how long will fha mip pay?
While the law has changed more than once on this issue, current guidance states that borrowers who put less than 10 percent down on an FHA loan must pay FHA mortgage insurance until the term ends. full loan. however, if you make a down payment of at least 10 percent, you can remove the fha mip after 11 years of payments.
“The length of time a borrower pays the monthly mortgage insurance premium varies depending on the terms of the original loan,” says Boomer.
pmi on a conventional loan, on the other hand, can usually be paid off once the homeowner has 20 percent equity in their home.
how to avoid fha mortgage insurance
if you are using an fha loan program, you will pay for mortgage insurance. All FHA loans carry mortgage insurance, either for the life of the loan or for a set number of years. You can avoid fha mortgage insurance by:
how to get rid of fha mortgage insurance
Paying for fha mortgage insurance for 11 years or more may sound heavy, but the expense doesn’t have to last forever.
Many borrowers use FHA loans as a stepping stone that can help them achieve the dream of homeownership, says Gary Acosta, co-founder and CEO of the National Association of Hispanic Real Estate Professionals. From there, they take steps to improve their credit scores and acquire more equity in their homes so they can refinance their FHA loan to a conventional loan with better terms.
“fha is a great starter loan, but at some point it can also be beneficial to refinance with lower monthly payments, even without [mortgage insurance premiums] or pmi,” says acosta.
It’s also possible to opt out of FHA mortgage insurance by paying off your mortgage, but that can take a significant amount of resources. Before you pay off your loan, be sure to weigh the financial pros and cons.
cost of fha mip vs. pmi
The speed at which you can eliminate mortgage insurance is obviously very different between fha loans and conventional loans, but costs are another key differentiator.
The amount you pay for PMI may vary based on your credit score and down payment amount. For borrowers with excellent or very good credit (FICO scores of 740 or higher), PMI payments may be lower. As described above, annual mortgage insurance premiums for FHA loans vary depending on the term and amount of the loan.
is fha mortgage insurance tax deductible?
the mortgage insurance deduction was recovered at the end of 2019. because of this, you may be able to itemize initial fha mip for tax year 2021 and also retroactively for tax years 2018, 2019 and 2020. its better to talk however, consult a tax professional to ensure you maximize this deduction if you are eligible.
pros and cons of fha mortgage insurance
these are some of the advantages of fha mip:
these are some of the disadvantages of fha mip:
It’s understandable to worry about the high costs of FHA mortgage insurance. Forking out a premium up front is already a tough pill to swallow, and paying additional premiums over years or even decades can really eat into your budget.
However, FHA mortgage insurance does not have to be paid forever, depending on the amount of the down payment or if you refinance the loan in the future. Investing in a home now could be a smart move, and an FHA loan could be what you need to make it happen.
“First-time homebuyers struggling to save for a down payment with a high debt-to-income ratio, such as college graduates with student loan debt, might find an FHA loan helpful,” Acosta says.
with additional reporting by holly johnson and tj porter