Are you a first-time homebuyer and are planning on using an FHA loan to buy your house? If so, hats off to ya, you've got a lot on your plate. One of those things that you're probably wondering is what is mortgage insurance premium and how much money will you have to shell out!
Don't worry, we've gotcha covered. We'll even do a deep dive and then tell you how it differs from PMI.
What is a mortgage insurance premium (MIP)?
Many people who use FHA loans are considered to be riskier borrowers. This is nothing personal against the borrower, but the Federal Housing Administration (FHA) created the loan so people with lower credit scores and lower down payments can afford their first house. Less money and lower credit = a higher chance of defaulting on the loan.
So, to protect the money that they lend to the homeowner, the FHA requires that everyone who puts less than 20% down on the house pay MIP.
While most insurance policies protect the consumer, this one actually only protects the lender if you are no longer paying toward the loan balance of your house.
How does MIP work?
Once you find a house and get the FHA loan approval, your lender calculates your mortgage insurance premium based on the loan to value ratio and the length of the loan. You are required to pay an upfront MIP (UFMIP) as part of your closing costs, and an annual mortgage insurance premium that they figure annually and wrap up into your monthly mortgage payment.
As of November 2018, the UFMIP amount (what you pay in your closing costs) is 1.75% of your FHA home loan. That means if you got a $250,000 home loan, you'll pay $4,375 toward UFMIP when you close on the house.
The mortgage insurance premium amount that they calculate annually and divide among your monthly payments is .85% for most FHA loans. So, for that $250,000 house you are buying, you'll pay $2,125 annually (or $177.08 per month) toward MIP.
How long do I need MIP for?
Paying 1.75% upfront and $2,125 every year you owe on the loan is quite a chunk of change for many to shell out for the life of the loan. If you're like many first-time homebuyers, you're probably wondering how in the world you can get rid of MIP. The answer may not thrill you.
If you bought your home before June 3, 2013—you are in luck. The FHA requires homebuyers who bought before then to pay their monthly MIP payments for 5 years on a loan term greater than 15 years. At that point, the MIP can drop off only if the balance of the loan reaches 78% of the home purchase price.
If, however, you purchased or refinanced your house after June 3, 2013, and your original LTV ratio is less than 90%, then your mortgage insurance premium drops off after 11 years.
If your LTV ratio is more than 90%—you'll pay the mortgage insurance premium for the life of the loan. That means regardless of your purchase price or if you streamline refinance the house, you'll still owe MIP for the life of the loan if your LTV is more than 90%.
Do all loans require MIP?
Not every home loan requires MIP. That being said, conventional loans, USDA loans, and VA loans, like FHA loans, require mortgage insurance (or equivalent) if your down payment is less than 20%. Here's the breakdown.
If you use a conventional loan and put down less than 20%, your lender will require that you pay for PMI (private mortgage insurance). The difference between PMI and MIP is that with MIP, you have no choice in your insurance rates or who the insurer is. With PMI, on the other hand, you can choose which PMI to go with, and you are free to shop around lenders and pick one with more appealing rates.
With PMI, you can expect little-to-no upfront cost and they typically have lower monthly rates than MIP. In most cases, when you reach 78% of your loan amount, have 20% equity in your home, or reach the midpoint of your amortization period, your PMI drops off.
The Department of Veterans Affairs backs up your VA loan and uses a funding fee that you pay upfront rather than a MIP or PMI. The amount you pay toward the funding fee depends on a few things, such as the length of your military service and your downpayment amount.
If you get a US Department of Agriculture loan, you can expect a similar process to the FHA's mortgage insurance premium, but with slightly cheaper rates. You must pay upfront as well as make monthly payments toward your mortgage insurance.
How does my credit score affect my MIP rates?
Credit scores do not affect your MIP rates. The mortgage insurance premium rates are dependent on your LTV ratio, length of your loan, and amount of your down payment.
If you pay less than 20% toward your down payment while using an FHA loan, you will need to pay MIP. The rates don't vary much from paying an 18% down payment versus an 8% down payment, but you may see a slight price increase if you pay less than 5% toward your down payment.
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