Federal Housing Authority (FHA) loans are a great option for buyers who can’t afford a 20% or even 10% down payment, or have a history of credit-related issues.
However, because the FHA is lending out money to less financially secure individuals, they typically require a mortgage insurance premium (MIP) in order to offset the increased risk that this type of lending carries.
The FHA bakes this added cost into your monthly mortgage premiums, but how much does it actually end up being? Here’s how to figure it out.
How to Calculate FHA Monthly Mortgage Insurance
Before you calculate your monthly mortgage insurance payments, you will have to know the size of your loan, loan terms, and your loan-to-value (LTV) ratio. These factors will give you a MIP percentage.
For example, if your LTV ratio is 95% on a $200,000 loan that has a 30-year fixed rate, your MIP will be 0.80%.
Check out these tables for more information on how to calculate your MIP.
MIP Rates for Loans That Last Over 15 Years
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Have your MIP? Here comes the complicated part.MIP Rates for Loans That Last Up To 15 Years
In order to calculate how much you are paying in mortgage insurance, you will have to use the MIP (.008) and multiply it by the average loan amount over the next 12 months.
This amount will include closing costs, upfront MIP, and other costs that were tacked onto your loan amount. Then, you divide that number by 12.
If you use the same example as above, you will be paying $125.70 in monthly mortgage insurance every month. The total monthly payments, including mortgage insurance, would add up to $1,076.74. This number does not include property taxes or other types of insurance.
Borrowers will also have to pay upfront mortgage insurance, but that requires a separate (and much easier) calculation.
There are also plenty of simple and free online mortgage insurance calculators that you can use to double check your math.
How to Save on Monthly Mortgage Insurance
FHA loans typically have lower interest rates than conventional loans, but adding an extra $125 MIP each month often makes them more expensive in the long run.
There are many ways to avoid monthly mortgage insurance payments and save money on your home purchase.
One way to save is to pay 20% up front. If you put down a 20% down payment on a loan, you can avoid mortgage insurance altogether.
In other words, if you can wait until you have enough saved up to put 20% down, you’ll end up saving a significant amount over the course of your loan.
If you’re okay with paying mortgage insurance in the short-term, consider getting an FHA loan and refinancing later on. Borrowers can refinance and change the terms of their loan to eliminate mortgage insurance payments.
If you’re planning on buying a home and currently evaluating your financing options, consider talking to an experienced real estate agent as a first step. Buyer’s agents can offer helpful advice during the mortgage application process and help point you in the direction of good lenders and trustworthy loan officers.
Want to connect with a top-rated agent near you? Fill out our online form and a Clever representative will be in touch to answer any questions you might have and connect you with a top-rated, local buyer’s agent for a no-obligation consultation.