FHA mortgage insurance

FHA Mortgage Insurance

FHA home loans are one of the most popular loan programs in America. If you have a mortgage or are looking into getting a new mortgage, you might have heard about FHA mortgage insurance. Loan applicants use FHA home loan programs for both purchase and refinance transactions.

In this article, I’ll cover everything you need to know about FHA mortgage insurance. Denifition, details, how much it costs, examples, and more.

FHA mortgage insurance defined

FHA mortgage insurance is a type of insurance policy issued by FHA to mortgage lenders to protect them against losses that may occur when a borrower defaults on an FHA home loan. There are two forms of FHA mortgage insurance; a one-time upfront premium amount charged by FHA to the borrower at closing, and the second is a monthly premium amount attached to the borrower’s mortgage payment.

Below are all the details you need to know to understand FHA mortgage insurance (MI) and how it will impact your finances. The more you know about FHA MI, the better you can determine if the FHA home loan program is right for you and your financial goals.

FHA mortgage insurance details

The main goal of FHA mortgage insurance is to encourage mortgage lenders to lend money to people who might not qualify for Conventional home loan financing. Whether it be because of a lower credit score, a low down payment, or both, FHA mortgage insurance allows lenders to approve more loan applications.

Upfront FHA Mortgage Insurance Premium

The upfront FHA mortgage insurance premium is an amount the loan applicant pays to FHA at the time of closing. It’s based on a percentage of the loan amount and has a partial refund built into it in case you refinance your loan into a new FHA home loan.

The upfront mortgage insurance premium is one lump sum, which can either be paid by increasing your interest rate to cover the cost or added to your loan amount. And that’s a great feature of the FHA loan program, adding the cost of MI to the loan amount rather than coming out of pocket for the full amount.

Monthly FHA Mortgage Insurance Premium

In addition to the upfront premium, there is also a monthly FHA mortgage insurance premium that is added to your monthly mortgage payment. Like the upfront premium, it is based on a percentage of the loan amount; however, it does the monthly premium does not have a partial refund built into the amount you’re paying.

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How much does FHA MI cost?

The upfront FHA MI premium and monthly FHA MI premium amounts are based on a percentage of your loan amount. The upfront premium is based on 1.75% of your loan amount (175 basis points), which is paid at closing1. The highest monthly premium is based on 0.85% of your loan amount (85 basis points), which you pay with your mortgage payment (it’s added on).

These percentages may change without notice. When you apply for an FHA home loan, be sure to confirm with your loan officer the current FHA MI cost.

An Example Of FHA Mortgage Insurance Cost

On a $250,000 loan, your upfront Mortgage Insurance cost (which can be added to the loan or paid with a higher interest rate) is $4,375.00. In some instances, this amount is refundable if you refinance the loan into a new FHA loan within a certain period of time (see below). The monthly FHA MI amount is $212.50.

If you are considering raising your interest rate to cover the FHA upfront MI premium cost, then your interest rate might increase from 0.125% to 0.375% (on most loans). Sometimes it’s higher, but that is the general range increase you would see if you rolled the FHA MI upfront premium into your interest rate.

Am I required to pay FHA mortgage insurance?

Yes, the homeowner is required to pay both the FHA upfront mortgage insurance premium and the monthly FHA mortgage insurance premium.2

There is no way of getting around paying it; however, keep in mind that 30-year fixed interest rates under the FHA home loan program are generally lower than Conforming interest rates, especially if your credit score is below 680.

Does FHA mortgage insurance impact DTI?

Yes. The monthly FHA Mortgage Insurance payment you make gets calculated in your Debt-To-Income ratio along with your mortgage payment, property taxes, and property insurance. If you have a monthly HOA fee, that will also be included in the DTI calculation.

Can I get rid of my FHA mortgage insurance?

There are two ways to get rid of your monthly FHA mortgage insurance premium; have a 10% down payment and wait eleven years for FHA MI to expire. Second, refinance into a Conventional loan that does not have a private mortgage insurance premium (PMI).3

Years ago, fifteen-year fixed FHA home loans did not have FHA Mortgage Insurance. During that time, the FHA 15-year fixed-rate home loan was much more popular than it is today. Most people choose the 30-year fixed FHA home loan over the 15-year fixed because it comes with a much lower payment.

When is the FHA upfront mortgage insurance premium refundable?

The FHA upfront mortgage insurance premium (MIP) is refundable (a portion) when you refinance into a new FHA loan within a three-year period.4 And the refund is based on a percentage of the amount you paid. There is a table (provided by HUD) that a lender consults to determine what your refund would be.

FHA Upfront Mortgage Insurance Premium Refund Chart

Below is the FHA upfront mortgage insurance premium refund chart from Housing and Urban Development (HUD). The “Month” column represents the number of months you’ve paid, and the “Refund” column represents the percentage amount you might be entitled to if you are eligible for a refund.

Table Source: HUD – 4155.2 7.2.i Elimination of UFMIP Refunds

If you have an FHA home loan and you are refinancing into a new one, please be sure to discuss a potential FHA upfront mortgage insurance premium refund with your loan officer. The refund is not a cash refund back to you but a credit to reduce the new FHA upfront mortgage insurance premium you’ll be paying on the new loan.

Remember, the refund only happens if you refinance into a new FHA loan program like the FHA Streamline Refinance.

Is FHA MI tax deductible?

There have been years in which the FHA mortgage insurance premium has been tax deductible, and some years it has not. The best thing to do is to ask your income tax professional to see if a tax deduction is available and if you are eligible for the deduction.

As with other financial transactions, make sure you keep all your documentation concerning any refinance or purchase transactions. Also, make sure you keep the tax documents your lender sends you after the year is over.

Your income tax professional will need this if FHA MI is a tax deduction for the year you file your taxes.

Do I still need homeowners insurance?

Yes. The FHA mortgage insurance premium does not cover your home in the case of fire or other possible damage. The FHA MI premium only protects the lender if you default on your mortgage.

Your homeowner’s insurance policy covers the expenses and losses you might incur if the house is damaged. When looking into homeowners insurance policies, make sure you contact at least two to three companies so you can compare quotes. If you live in a flood plain, you’ll have to get a separate flood insurance policy.

Homeowners’ insurance policies do not cover damages incurred from earthquakes.5 If you live in California, it’s not required to have earthquake insurance, but it’s something you might want to consider.

Do Conventional loans have mortgage insurance?

Some do, and some don’t.

If a home has less than 20% equity, the lender requires mortgage insurance (called private mortgage insurance, PMI, since the insurance policy is issued by a private company). The cost for PMI is lower than FHA MI, and the insurance amount is either added to the payment or built into the interest rate the homeowner is paying.

Private mortgage insurance does not have an upfront premium.

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Bottom line on FHA mortgage insurance.

Mortgage insurance is one of the most distinguishing characteristics of an FHA home loan.

All FHA home loans have MI. That includes the FHA 203k loan and the FHA Streamline Refinance program. When you speak with your loan officer, make sure you ask all the questions you need to so you are crystal clear on what you are paying.

The benefits of the FHA program, especially for those with less than perfect credit and/or a low downpayment, outweigh the downsides of FHA MI. Carefully evaluate your home loan options before you move forward with an FHA loan to ensure you are in the best possible program.

Citation Sources:

  1. What Is Upfront Mortgage Insurance Premium – FHA.com
  2. What is mortgage insurance and how does it work? – Consumer Financial Protection Bureau
  3. FHA mortgage insurance removal: Get rid of FHA MIP – The Mortgage Reports
  4. A Guide to the FHA MIP Refund Chart – MoneyTips.com
  5. Earthquake Insurance – Insurance.ca.gov
Loan Officer Kevin O'Connor

About The Author

Loan Officer Kevin O'Connor has over 17 years of experience as a Mortgage Loan Originator and is a trusted resource for mortgage education and information. He's the content creator of K.O. Home Loan Solutions and is licensed by the state of California and the Nationwide Mortgage Licensing System. He has a top rating with the Better Business Bureau, Google, Yelp, and Zillow. You can contact him at 1-800-550-5538. CA DRE #01499872 / NMLS #247447