If you’re approved for an FHA loan — which is a mortgage insured by the Federal Housing Administration (FHA) — you’re required to pay for FHA mortgage insurance. The insurance protects FHA-approved lenders against losses if you default on your mortgage payments.
FHA mortgage insurance is more expensive than private mortgage insurance (PMI) on a conventional loan, and is required regardless of your down payment amount. Understanding how much it costs and how it works will help you decide if an FHA mortgage is the best home loan option.
Private mortgage insurance (PMI) is an additional cost that comes with many home loans If your down payment is less than 20% of the purchase price, your lender will likely require PMI. This extra insurance protects the lender if you default on the loan.
FHA loans are a type of government-backed mortgage that also requires mortgage insurance, called MIP. FHA loan MIP tends to be more affordable than PMI on conventional loans.
In this article, we’ll explain how FHA MIP works, factors that determine your costs, and how to estimate your monthly payment.
What is FHA Mortgage Insurance?
The Federal Housing Administration (FHA) insures lenders against losses if borrowers default on their mortgages. This FHA mortgage insurance is called a mortgage insurance premium (MIP).
All FHA loans require an upfront MIP of 1,75% of the loan amount This can be paid at closing or rolled into your loan balance
Ongoing annual MIP is also required. Your annual FHA MIP depends on:
- Loan term
- Loan-to-value ratio
- Loan amount
On a 30-year FHA loan you’ll pay the annual MIP for the life of the loan if your down payment is less than 10%. With at least 10% down FHA MIP lasts 11 years.
Annual MIP rates range from 0.45% to 1.05% of the loan amount. For most borrowers, FHA MIP costs less than PMI on a conventional loan.
How Much Is FHA Mortgage Insurance?
As mentioned above, FHA mortgage insurance includes two costs – the upfront MIP and annual MIP. Let’s break these down further:
Upfront MIP
The upfront MIP equals 1.75% of your total loan amount. On a $200,000 loan, that’s $3,500 in upfront MIP.
You can pay this fee at closing or have it rolled into your loan balance. Paying it upfront avoids interest charges but results in higher closing costs.
Annual MIP
Your ongoing FHA MIP costs are based on:
- Loan term – 15-year loans have lower annual premiums than 30-year terms.
- Loan-to-value (LTV) ratio – The higher your LTV, the higher your annual MIP.
- Loan amount – For jumbo loans above $726,525, annual MIP rates increase.
Here are the current FHA annual MIP rates:
FHA 30-Year Loans
| Loan-to-Value Ratio | Annual MIP Rate | Duration |
|---|---|---|
| 95% or less | 0.80% | 11 years |
| 95.01% to 97% | 1.05% | Life of loan |
| 97.01% or more | 1.05% | Life of loan |
FHA 15-Year Loans
| Loan-to-Value Ratio | Annual MIP Rate | Duration |
|---|---|---|
| 90% or less | 0.45% | 11 years |
| 90.01% or more | 0.70% | Life of loan |
So on a $200,000 loan amount with 5% down, the annual MIP would be 0.80% of the loan or $1,600 per year. With 10% down, this annual cost would last 11 years before being removed.
Estimating Your Monthly FHA MIP
You can estimate your monthly mortgage insurance costs by taking your annual MIP rate and dividing it by 12.
For example, on a $200,000 FHA loan with 5% down:
- Annual MIP rate: 0.80%
- Annual MIP: 0.80% x $200,000 = $1,600
- Monthly MIP: $1,600 / 12 = $133
This $133 estimated MIP would be built into your monthly mortgage payment. Along with the upfront 1.75% MIP, mortgage insurance definitely adds to your homebuying costs. But it still tends to be more affordable than PMI on a conventional loan.
How Long Do You Pay FHA MIP?
As mentioned earlier, FHA MIP payment periods depend on your down payment amount and loan term:
30-Year FHA Loans:
- Down payment under 10% – Life of loan
- Down payment of 10-20% – 11 years
15-Year FHA Loans:
- Down payment under 10% – Life of loan
- Down payment of 10% or more – 11 years
Refinancing to a conventional loan can allow you to cancel PMI earlier. But with FHA, you’ll likely pay the annual premium for at least 11 years unless you put down 20%.
Can You Cancel FHA Mortgage Insurance?
For most borrowers, FHA MIP can’t be canceled until 11 years of payments have been made. The only way to remove MIP sooner is to refinance into a conventional loan.
You can request cancellation of your FHA MIP after 11 years if:
- Your loan is paid down to 78% loan-to-value or lower
- You have no late mortgage payments in the prior 12 months
- You meet other eligibility criteria
Paying down your loan aggressively can help you get rid of MIP sooner. But for most, FHA MIP will stick around for at least 11 years unless you refinance.
Alternatives to Paying High MIP
FHA MIP costs can really add up, especially if you’ll pay premiums for the 30-year loan term. Here are a few alternatives if you want to avoid high mortgage insurance:
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Save for a larger down payment – Putting down more upfront directly reduces your annual MIP costs. But this isn’t easy for most buyers.
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Consider FHA alternatives – VA and USDA loans often have lower upfront fees than FHA loans, and no monthly mortgage insurance.
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Improve your credit – A better credit score can help you qualify for a conventional loan and potentially lower PMI rates. But PMI typically costs more than FHA MIP.
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Ask about lender-paid MI – Some lenders offer programs where they pay your mortgage insurance costs in exchange for a slightly higher rate.
The Bottom Line
FHA loan MIP includes an upfront fee of 1.75% of the total loan amount. Ongoing annual MIP ranges from 0.45% to 1.05% based on your specific loan details and down payment amount.
These mortgage insurance costs are still usually lower than PMI on conventional loans. But MIP extends 11 years or more, so it’s a significant extra expense for FHA borrowers.
Understanding how FHA MIP works and estimating your costs can help you budget for a new home loan. While mortgage insurance isn’t ideal, FHA continues to be a viable low down payment option for qualifying buyers.
How much does FHA mortgage insurance cost?
The cost of the UFMIP for most purchase and refinance loans is 175 basis points, which is 1.75% of your loan amount. UFMIP is typically financed into your loan amount over the term of the loan, but can be paid entirely in cash.
The cost of annual MIP ranges between 15 and 75 basis points, which is 0.15% to 0.75% of your loan amount. The MIP is charged annually, divided by 12 and added to your monthly payment.
The cost of FHA mortgage insurance varies based on:
- Your loan-to-value (LTV) ratio. Lenders divide your loan amount by the value or price of your home to determine your LTV ratio. The more you borrow, the higher the LTV ratio.
- The loan term. Your loan term is the length of time you choose to pay off the loan, and is typically 15 or 30 years for FHA loans.
- The loan amount. Each year, new FHA loan limits are set based on the direction of home prices in the prior year. The maximum for a single-family home in most parts of the country in 2023 is $472,030. Borrowers in higher-cost parts of the country may be eligible for higher loan amounts, up to a maximum of $1,089,300.
- The loan purpose. Current FHA borrowers may be eligible for lower MIP premiums if they qualify for an FHA streamline refinance. Otherwise, MIP premiums for purchases and most refinance types are the same.
FHA MIP for mortgage term of more than 15 years*
| Base loan amount | LTV ratio | MIP charged (percentage of loan amount) | How long you’ll pay it |
|---|---|---|---|
| $726,200 or lower | Up to 90% 90% to 95% Above 95% | 0.50% 0.50% 0.55% | 11 years Life of loan Life of loan |
| More than $726,200 | Up to 90% 90% to 95% Above 95% | 0.70% 0.70% 0.75% | 11 years Life of loan Life of loan |
*Applies to all purchases and refinances except FHA streamlines, FHA refinance loans closed on or before May 31, 2009 and Hawaiian Home Lands loans.
FHA MIP for mortgage term of 15 years or less*
| Base loan amount | LTV ratio | MIP charged (percentage of loan amount) | How long you’ll pay it |
|---|---|---|---|
| $726,200 or lower | Up to 90% Above 90% | 0.15% 0.40% | 11 years Life of loan |
| More than $726,200 | Up to 78% 78% to 90% Above 90% | 0.15% 0.40% 0.75% | 11 years 11 years Life of loan |
*Applies to all purchases and refinances except FHA streamlines, FHA refinance loans closed on or before May 31, 2009 and Hawaiian Home Lands loans.
FHA MIP for FHA streamline refinances
| Base loan amount | LTV ratio | MIP charged (percentage of loan amount) | How long you’ll pay it |
|---|---|---|---|
| All | Up to 90% Above 90% | 0.55% 0.55% | 11 years Life of loan |
How does FHA mortgage insurance work?
FHA-approved lenders are required to disclose the cost of FHA mortgage insurance when they provide a loan estimate. Both the upfront and annual mortgage insurance premiums must be collected to insure an FHA mortgage, but you’ll pay each type differently.
The upfront mortgage insurance premium (UFMIP) works as follows:
- It’s charged in a lump sum equal to 1.75% of your loan amount
- It’s typically financed (added) to your mortgage amount
- It can be paid in cash, as the long as the amount is paid in full (partial cash payments aren’t allowed)
- It isn’t refundable unless you replace your current FHA loan with a new FHA loan
- It’s required regardless of your down payment amount or credit score
The annual (or periodic) mortgage insurance premium (MIP) works as follows:
- The premium amount is charged annually based on the following factors:
- The LTV ratio
- Your base loan amount
- The mortgage term
- The premium is divided by 12 and charged in monthly installments that are added to your monthly mortgage payment
- The premium is required regardless of your down payment or home equity amount
- The monthly premium is the same regardless of your credit score
How to calcuate PMI on a FHA Loan – How to get rid of PMI – FHA Loan 2022
FAQ
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