FHA Mortgage Insurance: How MIP Works and What It Costs

FHA loans help many buyers get into a home with a modest down payment and more flexible credit guidelines. Part of what makes that possible is mortgage insurance. If you are considering an FHA loan, understanding how this insurance works will help you compare it with other options and plan for the long run.

What FHA Mortgage Insurance Does

FHA mortgage insurance, called the mortgage insurance premium or MIP, protects the lender if a borrower stops making payments. You pay for it, but it is what allows FHA lenders to offer loans with as little as 3.5% down for borrowers with a credit score of 580 or higher.

FHA mortgage insurance comes in two parts.

Upfront Mortgage Insurance Premium

The upfront premium is 1.75% of the base loan amount. Most borrowers choose to add it to their loan rather than pay it in cash at closing, which keeps upfront costs lower but slightly increases the loan balance.

Annual Mortgage Insurance Premium

The annual premium is divided into twelve parts and included in your monthly mortgage payment. The rate depends on several factors:

• Your loan amount
• Your down payment, which determines your loan-to-value ratio
• Your loan term, such as 15 or 30 years

Generally, a larger down payment and a shorter term lead to a lower annual premium. Your loan officer can show you the exact figure for your scenario on your Loan Estimate.

How Long You Pay It

This is one of the biggest differences between FHA and conventional loans. On a conventional loan, private mortgage insurance can typically be removed once you reach 80% loan-to-value. FHA works differently. With a smaller down payment, the annual premium typically stays for the life of the loan. With a larger down payment, it may end after a set number of years. Check the terms of your specific loan.

Ways to Eventually Drop MIP

If your FHA mortgage insurance is set to last for the life of the loan, the most common way to remove it is to refinance into a conventional loan once you have built enough equity. Your equity can grow through regular payments, extra principal payments and rising home values. If you reach 20% equity, a conventional loan may let you avoid mortgage insurance entirely. Whether a refinance makes sense depends on current rates, closing costs and how long you plan to stay.

Is FHA Still Worth It?

For many buyers, yes. FHA loans can be a great fit if:

• Your credit score is still building
• You have limited savings for a down payment
• Your debt-to-income ratio is on the higher side
• You want a path to ownership sooner rather than later

If you have strong credit and can put down a bit more, a conventional loan may cost less over time because PMI can be removed. Comparing both side by side is the best way to decide.

How MIP Fits Into Your Budget

When you compare loan offers, look at the full monthly payment, including principal, interest, property taxes, homeowners insurance and mortgage insurance. Because the upfront premium is usually financed, it adds a little to your loan balance and therefore to your monthly principal and interest as well. Seeing all of these pieces together helps you judge whether an FHA loan or another option fits your budget better, both now and several years down the road.

Questions to Ask Your Loan Officer

1. What would my upfront and monthly mortgage insurance be on an FHA loan?
2. How does that compare with PMI on a conventional loan for my situation?
3. How long would my MIP last based on my down payment?
4. What would I need to do to refinance out of MIP later?

Learn more on our FHA home loan page, then reach out to FLO Mortgage to compare your options with a loan officer.

This article is for general education and is not a commitment to lend. All loans are subject to credit approval, underwriting guidelines and program availability. FLO Mortgage, Company NMLS #1835856. Equal Housing Opportunity.