FHA MIP Mortgage Insurance Premium
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What You Should Know
- Mortgage insurance premium (MIP) for FHA loans includes an upfront fee (UFMIP) and an annual fee that is paid in monthly installments.
- Annual FHA MIP rates range from 0.45% to 1.05% depending on the mortgage term, base loan amount, and LTV ratio while upfront MIP is set at 1.75% for all FHA loans.
- Annual FHA MIP duration lasts 11 years for FHA loans with an LTV ratio of less than or equal to 90% and for the mortgage term if the LTV ratio of the mortgage is more than 90%.
What Is Mortgage Insurance Premium (MIP) for FHA Loans?
FHA Mortgage Insurance Premium (MIP) is an insurance that is paid by the borrower, and it protects the lender in case the borrower defaults on their loan. Private mortgage insurance is usually required by lenders for conventional loans, but FHA loans have their own mortgage insurance that is paid by all FHA mortgage borrowers.
FHA MIP is required for all FHA loans because these loans provide more favorable terms than conforming loans including lower down payment requirements. The FHA MIP fee structure consists of an upfront fee and an annual premium:
1. Upfront Fee (UFMIP): 1.75% of the original mortgage principal.
2. Annual Fee (MIP): 0.45% to 1.05% of the outstanding mortgage principal. The exact rate depends on the term of the loan, loan amount, and loan-to-value (LTV) ratio.
There are different options available for the borrower to pay the fees. A borrower can either pay the FHA MIP upfront fee at closing, or they can choose to include it in their loan principal, resulting in increased FHA mortgage payments. It is important to note that the FHA loan rate may increase if the borrower decides to include the UFMIP in the loan amount. The FHA MIP annual fee is calculated annually and is paid in monthly installments with the mortgage payments. You can use the FHA Mortgage Insurance Calculator to estimate your FHA MIP payments.
\Example of FHA Mortgage Insurance Premium for a $300,000 Mortgage
If your home price is $315,000, and you pay $15,000 as the down payment , your mortgage loan will be $300,000. For a mortgage loan of $300,000, you will need to pay 1.75%, or $5,250, as your upfront MIP premium. You can pay this at closing or put it into your mortgage, where it will be amortized over your mortgage term. For a 30-year term and loan-to-value (LTV) ratio of 96.5%, you will also have to pay an annual MIP of 0.85%.
For a 30-year fixed mortgage at 3% interest, your initial $300,000 mortgage will have monthly payments of $1,265. The MIP will be $212.50 a month, increasing your monthly payment to $1,477.5 a month.
If you choose to put your upfront insurance premium as part of your mortgage, that will increase your monthly payments by an additional $22 to $1499.50 .
+ Upfront MIP ($1,265+$22)+Monthly MIP $212.50=Total Monthly Payment $1,499.50
What is Loan-to-Value (LTV)?
The Loan-to-Value (LTV) Ratio signifies the mortgage amount you are borrowing against the appraised value of the house. For example, if the appraised value of the house is $100,000 and the down payment is 10% or $10,000 ($100,000 * 10%) then the mortgage amount is $90,000 ($100,000 - $10,000), the LTV is $90,000/$100,000 which is 90%. Therefore, as the LTV increases the mortgage risk for the lender also increases.
How Is Annual FHA MIP Determined?
As mentioned above the annual cost is variable and can change based on the size of the loan, down payment and term of the loan. There are different sets of fees for mortgage terms longer than 15 years (e.g. 30-year fixed rate mortgages) and mortgage terms equal to or less than 15 years.
| Base Loan Amount | LTV Ratio | MIP | Duration |
|---|---|---|---|
| Less than or equal to $625,000 | ≤ 90% | 0.80% | 11 years |
| > 90% but ≤ 95% | 0.80% | Mortgage Term | |
| > 95% | 0.85% | Mortgage Term | |
| Greater than $625,000 | ≤ 90% | 1% | 11 years |
| > 90% but ≤ 95% | 1% | Mortgage Term | |
| > 95% | 1.05% | Mortgage Term | |
Your Loan-to-Value (LTV) Ratio affects the FHA MIP annual fee because a higher LTV means a smaller down payment resulting in greater risk for the lender and hence higher fee. If the LTV is less than 90% the MIP fee is 0.8%, as LTV increases to greater than 95%, the fee increases to 0.85%.
Duration of Payment refers to the length of the period you have to pay the annual FHA MIP. The minimum duration is 11 years if you have a lower LTV and the maximum is the term of the loan or the entire period. For example, if you have a 30-year fixed rate mortgage and your LTV is greater than 90%, then you have to pay the FHA MIP annual fee for all 30 years.
| Base Loan Amount | LTV Ratio | MIP | Duration |
|---|---|---|---|
| Less than or equal to $625,000 | ≤ 90% | 0.45% | 11 years |
| > 90% | 0.70% | Mortgage Term | |
| Greater than $625,000 | ≤ 78% | 0.45% | 11 years |
| > 78% but ≤ 90% | 0.70% | 11 years | |
| > 90% | 0.95% | Mortgage Term | |
If your LTV is less than 90%, you will have to pay an annual FHA MIP of 0.45% for a minimum duration of 11 years. If your LTV is greater than 90%, you will have an FHA MIP of 0.7% and for the whole mortgage term.
For a loan amount greater than $625,000, if you have an LTV less than 78%, your FHA MIP can be as low as 0.45%, which is the lowest rate for an FHA loan. As the LTV increases the MIP increases and the duration becomes the length of the mortgage.
Is FHA MIP Tax Deductible?
According to Publication 936 of the IRS, FHA MIP, including upfront and annual fees, are tax deductible for the tax years 2018 to 2021. FHA MIP can be written off as an itemized deduction, but it cannot be written off as a standard deduction. Currently, there is no legislation that allows FHA MIP to be tax deductible for the tax years after 2021, but it may change in the future as the legislators pass new bills related to mortgage insurance premiums.
PMI vs MIP
Private Mortgage Insurance (PMI) and FHA Mortgage Insurance Premium (MIP) both have the same purpose: to protect the lender in the case the borrower cannot cover their mortgage payments.
| Private Mortgage Insurance (PMI) | Mortgage Insurance Premium (MIP) | |
|---|---|---|
| Lender | Private institutions like banks | FHA approved institutions |
| Down Payment | <20% | All FHA loans require MIP |
| Credit Score | Affects premium | Does NOT affect premium |
| Structure | Annual fee | Upfront fee + Annual fee |
| Rate | Annual fee: 0.5-2% | Upfront fee: 1.75% Annual fee: 0.45-1.05% |
| Length | Removed when LTV is 78% or when borrower has 20% home equity | Less than 10% Down payment: Entire term of the loan More than 10% Down payment: 11 years |
PMI applies to conventional loans given by banks and private institutions where the down payment is less than 20%. FHA MIP, on the other hand, is required by all FHA loans, and it is mainly different from PMI in its fee structure as well as term structure. In both cases, the insurance costs are passed on to the buyers, but in the case of PMI, the mortgage insurance is supplied by a private mortgage insurer.
PMI rate on conventional loans is affected by your credit score, such that a higher credit score will result in a better rate. Whereas FHA MIP rate is set and does not get impacted by your credit score.
Structure of insurance premiums also defer between PMI and MIP. PMI has one fee which is 0.5-2% of the loan amount per year, whereas for FHA loans, MIP has an upfront fee of 1.75% and annual fees ranging from 0.45% to 1.05% on original loan amount.
PMI on loans can be removed from the mortgage once the loan-to-value (LTV) ratio reaches below 78% or the buyer has 20% stake in the house. However, for FHA MIP, if the down payment is less than 10% then the annual premium will have to be paid for the entirety of the term; if the FHA down payment is at least 10% then MIP can be removed after 11 years of payment.
FHA Loan Recent Updates
The Federal Housing Administration periodically updates the requirements, terms, and conditions related to FHA loans. Even though it is periodically updated, regular borrowers do now need to keep track of all the changes closely because most of them apply to lenders. In addition to that, originated FHA loans cannot be simply changed, so any borrower who has an outstanding FHA loan should not be worried about upcoming changes to the FHA Housing Policy Handbook.
In the past decade, there have been a few changes that relate to the FHA mortgage insurance premium. It might be useful to learn about these changes to new FHA borrowers as well as current FHA loan holders who have been paying off their loans for some time.
Base loan limits may be the most frequently updated FHA loan condition because it is revised annually and is based on the median home price in a given year. The base loan limit for low-cost areas, also known as the FHA loan limit floor, is set at $420,680 for the year 2022. The base loan limit for high-cost areas, also known as the FHA loan limit ceiling, is set at $970,800 for the year 2022. All other areas that fall between the floor and ceiling have their limits set at 115% of the median home price in the area.
Over the past decade, there have been a few updates that directly or indirectly affect the FHA mortgage insurance premiums. FHA loan borrowers who have secured their loans before the changes took place should not see any changes to their loans because the changes apply only to newly originated FHA mortgages. The following list provides an overview of the most significant changes to FHA MIP that have taken place over the last decade.
The most recent and significant update to mortgage insurance premiums on FHA loans has been released on September 14, 2015. This update focused on changing the upfront and annual fees related to the FHA mortgage insurance premium. The Federal Housing Administration plays the role of the insurer when it comes to FHA loans. This means that they heavily rely on mortgage insurance premiums to balance their budget. This department focused on balancing their income from insurance by tweaking upfront and annual fees.
During the year 2015, the Federal Housing Administration found a set of upfront and annual fees that allow them to consistently provide insurance and avoid large deficits and losses in their day-to-day activities. Since September 14, 2015, FHA mortgage insurance premiums have not been updated.