What Are Mortgage Insurance Premiums?
Mortgage insurance premiums (MIPs) pay for insurance to protect mortgage lenders against the risk that borrowers won’t pay them back. MIPs add to a borrower’s costs, but they allow you buy a house with a lower down payment than the usual 20%. There are different kinds of mortgage insurance premiums, which differ in amount, timing and other rules.
There are different names for different kinds of mortgage insurance. There are also different payment methods for each.
If your loan is backed by the Federal Housing Administration (FHA), you’ll likely encounter mortgage insurance premiums.
The Department of Agriculture has another government loan initiative with a mortgage insurance requirement similar to that of the FHA.
Borrowers who use loan programs from the U.S. Veterans Administration to buy homes will pay a funding fee. This amounts to much the same thing as mortgage insurance.
Finally, mortgage insurance for conventional loans is called private mortgage insurance or PMI. Conventional lenders require this for some loans.Who Has to Pay Mortgage Insurance Premiums?
Many borrowers don’t pay for mortgage insurance. If a loan is a conventional loan, as most are, then only borrowers who put down less than 20% of the purchase price of the home generally have to have mortgage insurance.
Every FHA borrower pays mortgage insurance premiums, however. There are two kinds: an up-front premium and an annual premium.
All FHA loans include a one-time up-front mortgage insurance premium (UFMIP). This is paid either at or soon after closing. In addition to this upfront MIP, FHA borrowers who put down less than 20% also have to pay annual premiums. These annual premiums are divided into 12 equal amounts. They are a part of the loan’s monthly payment along with interest and principal, and usually along with taxes and insurance as well.How Much Do You Have to Pay?
The FHA uses a formula to determine set the cost of mortgage insurance premiums. This formula is based on, among other things, the amount of the loan, the amount of the down payment and the number of years the mortgage lasts.
The easiest way to estimate your monthly MIP is to use an online calculator. The FHA’s online What’s My Payment calculator. You’ll need to input the following information:
The calculator spits out an estimate for your total payment based on that information. As part of that it gives you the dollar cost of your FHA mortgage insurance premium.
For instance, for a loan on a $250,000 California home with a 3.50% down payment, 4.25% interest rate and 30-year term, the calculator estimates you’ll make a total payment of approximately $1,615 each month. Of that, approximately $170 is the monthly mortgage insurance premium.
The up-front mortgage insurance premium uses a simpler formula of 1.75% of the loan amount, or $1,750 for each $100,000 of the base loan amount. The FHA calculator also gives you this figure. On the previous example the UFMIP is approximately $4,200.
You can either roll the cost of the UFMIP into the loan and add it to the base loan amount, or you can pay it up front. Regardless, all FHA loans require an up-front mortgage insurance premium.
The What’s My Payment? calculator gives you a close estimate of the total approximate payment on an FHA loan, but a mortgage broker or banker can suggest more accurate figures.How Long Do You Have to Pay?
Not every FHA borrower has to pay the monthly mortgage insurance premium for the life of the loan. Borrowers who took out a loan before June 2013 can ask their loan servicer to stop requiring the monthly premium once they’ve paid off 22% of the loan.
If you take out an FHA loan today, however, the rules are different. If you put down more than 10% but less than 20%, you pay mortgage insurance premiums for 11 years. If you put down less than 10%, you’ll have to pay monthly premiums for the life of your FHA loan.
The only way to end the monthly payments is to pay the FHA loan off in full. The most common way to do this is by refinancing with a conventional mortgage. If the amount of the conventional refinance loan is more than 80% of the home’s value, however, you may still have to pay for private mortgage insurance.
Premiums for PMI may be higher than the monthly MIPs for an FHA loan. However, you may be able to avoid PMI depending on the lender. And unlike with FHA loans, you won’t have to pay PMI premiums forever. You can request that it be removed once you have paid down the mortgage balance to 80%. Lenders are legally required to remove PMI on loans once the balance reaches 78% of the principal.
Finally, if your home’s value has appreciated enough you may be able to refinance and borrow the same amount (or even more) and still have a loan-to-value ratio of less than 80 percent. Then you won’t have to pay any mortgage insurance at all.
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