Mortgage insurance is required on all Federal Housing Administration mortgages. FHA mortgage insurance is called mortgage insurance premium, or MIP. It protects lenders from borrower default on FHA-insured mortgages. MIP is issued only by FHA. Private mortgage insurance, or PMI, is not the same as MIP. It is issued to protect lenders from borrower defaults on conventional mortgages.
If you buy a home with an FHA-insured mortgage, MIP is required regardless of the amount of your down payment. You will be required to maintain MIP until the loan-to-value ratio of your mortgage is 78 percent, or for five years, whichever comes last. Loan-to-value is the amount of your outstanding mortgage as a ratio to the amount you paid for your home. If it took nine years for your LTV to reach 78 percent, you would be obliged to carry MIP for nine years. Despite the MIP requirement, FHA-insured mortgages remain very popular with many home buyers because you can buy a home with a down payment of as little as 3.5 percent.
FHA Insurance Rates
FHA mortgage insurance has two rate schedules: one for mortgages of $625,000 or less and one for mortgages over $625,000. It has two parts. The first part is called the upfront mortgage insurance premium, or UFMIP. This one-time assessment may be paid at closing or folded into the mortgage. UFMIP is 1.75 percent of the base mortgage and applies to all mortgages regardless of the mortgage amount. The second component is the annual premium, MIP itself. MIP is 1.25 percent of the outstanding mortgage for mortgages of $625,000 or less and 1.5 percent for mortgages over $625,000. MIP is recalculated annually and is included in your monthly mortgage payment. Because FHA insurance rates change frequently, check with your real estate agent or visit the FHA website for current rates.
Calculating Your FHA Insurance
According to the U.S. Census Bureau, the average price for a new home in 2010 was $272,900. Therefore, FHA insurance rates for mortgages of $625,000 or less apply to most home buyers. Using a home selling price $100,000 with a down-payment of $3,500 -- 3.5 percent -- your base mortgage is $96,500. The total amount of your FHA insurance payments for the first year would be $2,895. This includes your UFMIP of $1688.75 and your MIP of $1,206.25. Of course, UFMIP disappears in the first year unless you fold it into your monthly payments.
PMI for Conventional Mortgages
Conventional mortgages with down payments of 3.5 percent or lower are difficult to find. Most lenders require PMI for conventional mortgages with LTV ratios greater than 80 percent. Finding a conventional mortgage that requires a only 10 percent down payment, however, is not quite as difficult with good credit and stable employment. If you can obtain a conventional mortgage with a 10 percent down payment, your PMI will be 0.5 percent of the outstanding mortgage. There is no upfront funding fee with PMI. Moreover, you can cancel PMI as soon as your LTV reaches 80 percent.
- HUD.gov: The Federal Housing Administration (FHA)
- Mortgage101: Mortgage Insurance
- Department of Housing and Urban Development: Single Family Mortgage Insurance: Annual and Up-Front Mortgage Insurance Premium – Changes
- Anytime Estimate: Closing Costs Calculator
- LenderStreet: Private Mortgage Insurance (PMI) Explained
- U.S. Census.gov: Median and Average Sales Prices of New Homes Sold in United States
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