FHA Mortgage Insurance (MI) is an insurance policy attached to all FHA home loans the homeowner pays. The policy covers the mortgage lenders’ losses in the event of a homeowner’s default.
There are two forms of FHA MI; the first is a one-time upfront amount at the time of closing (Upfront Mortgage Insurance Premium), and the second is a monthly amount attached to your mortgage payment each month.
Below are all the details you need to know to understand FHA 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 Explained
Mortgage Insurance is one of the most distinguishing characteristics of an FHA home loan. If you are obtaining a new FHA home loan it’s essential to understand all the details of what FHA Mortgage Insurance is, the cost, and how to remove FHA Mortgage Insurance.
All FHA home loans have MI. That includes the FHA 203k loan and the FHA Streamlined Refinance program. When you speak with (or email) your Loan Officer, make sure you ask all the questions you need to so that you have the best possible understanding of FHA Mortgage Insurance.
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FHA Mortgage Insurance, Is It Required?
Yes, the homeowner is required to pay the FHA Mortgage Insurance1. 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 lower than Conforming interest rates, especially if your credit score is below 680.
As mentioned, there are two forms; one is paid upfront at closing, and the other is an amount added to your monthly mortgage payment. The upfront cost 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.
How Much Does FHA Mortgage Insurance Cost?
The upfront and monthly 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 closing2. 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).
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 by the lender 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; be sure to discuss this with the Loan Officer. The monthly amount is $212.50.
If you are considering raising your interest rate to cover the upfront 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 premium into your interest rate.
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?
The only way to get rid of your monthly FHA Mortgage Insurance premium is if you put 10% down when you buy the home and wait eleven years for FHA MI to expire or refinance into a Conventional loan that does not have a Private Mortgage Insurance premium (PMI)4. Another option would be to sell the home.
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 Premium Refundable?
The upfront premium is refundable (a portion) when you refinance into a new FHA loan within a three-year period3. There is a table a lender consults to determine what your refund would be. Here is the current table:
| FHA Mortgage Insurance Refund Table | |||||
| MAC | REFUND | MAC | REFUND | MAC | REFUND |
| 1 | 80% | 13 | 56% | 25 | 32% |
| 2 | 78% | 14 | 54% | 26 | 30% |
| 3 | 76% | 15 | 52% | 27 | 28% |
| 4 | 74% | 16 | 50% | 28 | 26% |
| 5 | 72% | 17 | 48% | 29 | 24% |
| 6 | 70% | 18 | 46% | 30 | 22% |
| 7 | 68% | 19 | 44% | 31 | 20% |
| 8 | 66% | 20 | 42% | 32 | 18% |
| 9 | 64% | 21 | 40% | 33 | 16% |
| 10 | 62% | 22 | 38% | 34 | 14% |
| 11 | 60% | 23 | 36% | 35 | 12% |
| 12 | 58% | 24 | 34% | 36 | 10% |
| *MAC = the number of Months After Closing | Source: | HUD |
Please be sure to discuss a potential refund with your Loan Officer. The refund is not a cash refund back to you but a credit to reduce the new 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 tax consultant 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 tax preparation person 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.
A homeowner’s insurance policy only covers the expenses and losses a homeowner might have 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.
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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). 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.
The Breakdown
FHA Mortgage Insurance is certain if you apply for an FHA home loan. 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 options and talk with your Loan Officer to see if this program is right for you and your financial situation.
Sources:
- What is mortgage insurance and how does it work? – Consumer Financial Protection Bureau
- What Is Upfront Mortgage Insurance Premium – FHA.com
- A Guide to the FHA MIP Refund Chart – MoneyTips.com
- FHA mortgage insurance removal: Get rid of FHA MIP – The Mortgage Reports
