What is MIP on an FHA mortgage loan?
Obtaining an FHA loan with insurance premiums
- FHA loans require insurance premiums unless you make a down payment of 20 percent or more.
- Insurance premiums vary upon the amount and length of the loan and the loan-to-value ratio.
- Annual premiums are factored into your monthly escrow payment; borrowers cannot purchase PMI.
If you want to secure a home mortgage loan backed by the Federal Housing Administration (FHA), you also need to pay for the mortgage insurance premium (MIP), which helps protect lenders that originate FHA loans in case of a default.
Insurance premiums, per federal regulations, are collected on FHA loans where the down payment was less than 20 percent of a property’s appraised value. Loans needing insurance-premium coverage require an upfront payment of 1.75 percent of the loan amount, followed by annual installments that are collected monthly along with the mortgage payment and paid into an escrow account.
Some FHA insurance premiums must be paid for the life of the loan, while others are satisfied after 11 years. This is different from private mortgage insurance (PMI), which can be removed once the principal balance on the loan falls below 80 percent of the original value of the house. A full MIP chart is available on the FHA website.
How much are the current premiums?
The amount you’ll pay depends upon the amount borrowed and the term, or duration, of the mortgage loan, as well as the loan-to-value (LTV) ratio. The premiums are based on the actual loan amount, so down payments are subtracted from the calculations. FHA loans require a minimum down payment of 3.5 percent, which makes them attractive to first-time homebuyers.
For loans with terms longer than 15 years, annual MIP rates are between 0.8 percent and 1.05 percent. On a 30-year, $500,000 loan with 3.75 percent interest and an LTV of 96.5 percent, for example, a homeowner who made the minimum down payment of $17,500 would pay an upfront premium of about $8,444. In addition, roughly $342 would be added to that borrower’s monthly mortgage payment, which would be held in escrow to pay the annual 0.85 percent MIP.
For loans of 15 years or less, rates drop by nearly half in some cases. Premiums can last for the entire length of the loan, however, and most still last a minimum of 11 years. Borrowers can find FHA loan calculators online that can help determine their MIP payments.
How will this affect my total mortgage payment?
FHA premiums are paid yearly, but are factored into your monthly escrow payment, which also includes local taxes and homeowners insurance. Everyone with an FHA loan is required to pay the MIP through their lender or servicer — in other words, no opting out to pay on your own or through a private mortgage insurance provider.
The premium rates were scheduled to drop at the beginning of 2017 by 0.25 percent, which the FHA estimated would have saved the average homeowner around $500 per year. That rate decrease was suspended indefinitely, however, and is not likely to be reinstated in 2018.