Federal Housing Administration (FHA)-backed loans are popular with home buyers and refinancing homeowners for multiple reasons, including:
However, one place FHA mortgages don't always measure upÂ is with respect to mortgage insurance.
As compared to conventional mortgages, USDA loans, and VA loans, FHA mortgage insurance premiums (MIP) can be cumbersome and costly.
Paying FHA MIP doesn't haveÂ to be a permanent, however. With home values up and current mortgage rates down, millions of U.S. homeowners are nowÂ "in the money" to refinance their FHA MIP away.
If you're paying FHA MIP each month and think you're paying too much, it's time to consider your options. Your FHA MIP obligation could be endedÂ within the next 30 days.Click to see today's rates (Feb 8th, 2016)
The Federal Housing Administration'sÂ role in mortgages is different from the role of Fannie Mae and Freddie Mac. The FHA doesn't "buy mortgages" from banks like Fannie and Freddie do in order to create market liquidity.
Rather, the FHA is an insurer of mortgages.
It works like this:Â The Federal Housing AdministrationÂ publishes official mortgage guidelines to which banks can choose to underwrite a mortgage. Mortgages which meet these published guidelines can be insured.
Loans which the agency insures are typically known as "FHA mortgages".
The Federal Housing AdministrationÂ is a backstop to the banks. Should your loan ever go into default, the FHA is there is to repay the bank's loss -- much like an auto insurer pays a claim due to accident.
Federal Housing Administration is mostly self-funded.
Default claims are paid from a fund called the Mutual Mortgage Insurance (MMI) fund. The MMI fund is populated via two types of mortgage insurance premiums paid by FHA-backed borrowers.
The two MIP types are the FHA Upfront Mortgage Insurance Premium (UFMIP), and the FHA annual Mortgage Insurance Premium (MIP).
AllÂ FHA-insured homeowners are required to pay both insurance types and, for many FHA homeowners, FHA MIP lasts for the life of the loan -- up to 30 years.
As a homeowner, though, your mortgage (and its future) belongs to you.Â You retain have the right to cancel your FHA loan and its monthly FHA MIP payment.
And, as home values have increased this decade, canceling FHA loans isÂ exactly what FHA-backed homeowners have chosen to do.Click to see today's rates (Feb 8th, 2016)
The Federal Housing Administration'sÂ mortgage insurance requirements vary by loan type and length; and there are two types of mortgage insurance required.
Note, however, that the FHA has changed its MIP schedule several times in the last half-decade. The MIP rates listed below are accurate as ofÂ February 8, 2016.
The FHA's current upfront mortgage insurance premium (UFMIP) is 1.75 percent of your loan size.
For example, if you use an FHA-backed mortgage for a purchase mortgage and your loan size is $300,000, then your Upfront MIP will be 1.75 percent of $300,000, or $5,250.
Upfront MIP is not paid as cash. Upfront MIP is automatically added to your loan balance by the Federal Housing Administration. With the same $300,000 loan size, then, accounting for Upfront MIP, your actual borrowed amount will be $305,250.
Upfront MIP does not affect your loan's loan-to-value (LTV) calculation.
You can make a 3.5% downpayment on your purchase, add the UFMIP to your borrowed amount, and still meet the FHA's minimum downpayment guidelines.
The 1.75% Upfront MIP is collected at closing and paid into the Mutual Mortgage Insurance fund. You'll never be asked to pay it again.
This is why it's called "upfront" MIP.
However, if you refinance your FHA mortgage within the first 36 months of closing, the government will give you an upfront MIP refundÂ on your "unused" MIP portion.Â The refund is based on your original Upfront MIP payment, and decreases by 2 percentage points annually until no money remains to be refunded.
The second type of Federal Housing Administration mortgage insurance is the FHA's annual Mortgage Insurance Premium (MIP).
Annual MIP is paid in 12 installments per year, and is included in your monthly mortgage payment.
On your monthly mortgage statement, FHA MIP is a line-item, often listed as "HUD Escrow", "Risk-Based HUD", or "Monthly Mortgage Insurance".
It's rarely shown as "FHA mortgage insurance"
Annual MIP is required for all FHA mortgages. The size of your premium will depend on your loan's specific characteristics, and when you loan began.
For example, the annual mortgage insurance premium for a loan from 2010 is different from the MIP for a loan from 2013. This is because the FHA has changed its annual MIP requirement multiple times since 2008.
Since 2008, the FHA annual MIP schedule has been as follows, assuming a 30-year fixed-rate FHA mortgage with 3.5% downpayment:
FHA borrowers can also expect an additional 0.25 percentage point premium on loans which exceedÂ $625,500, but less than $729,750.
Such "jumbo FHA loans" are available in high-cost areas only, where the median home sale price handily exceeds the national average; and for refinances.
The maximum FHA loan size for 1-unit homes was reduced to $625,500 in late-2013. It remains at that level today.
FHA MIP has changedÂ 7 times in sevenÂ years forÂ FHA purchase loans and for many of the FHA-backed refinances.
However, there is a group of current FHA homeowners for whomÂ MIP will stay low.
Several years ago, to help U.S. homeowners capitalize on the lowest mortgage rates of a lifetime, the FHA passed a rule exempting long-standing FHA homeowners from increases to the FHA MIP.
If your current FHA loan was endorsed on, or before, May 31, 2009, you can FHA refinanceÂ for cheap.
For such "grandfathered" borrowers, upfront mortgage insurance premiums are justÂ 0.01%, or $10 per $100,000 borrowed.Â Furthermore, annual MIP rates are just 0.55%.
For grandfathered loans, premiums are the same across all 15-year and 30-year mortgages, regardless of LTV.Click to see today's rates (Feb 8th, 2016)
Not all FHA-backed homeowners will qualify for grandfather mortgage insurance premiums; nor do all FHA-backed homeowners have MIP automatically canceled at 78% LTV.
Some are prescribed to pay MIP for the next 30 years. Maybe that's you. The good news is thatÂ FHA mortgage insurance is never permanent.
You can alwaysÂ ask toÂ refinance out.
First, let's talk about homeowners with an FHA mortgageÂ pre-dating June 3, 2013.
For these homeowners, their FHA MIP will automatically cancel when the following conditions are met :
Homeowners should note that LTV calculations are based on the FHA's last known value of the home -- not its current appraised value.
For many people, the "last known value" is the value of the home at the date of purchase; the last time the home was FHA-appraised.
Typically, aÂ 30-year FHA mortgage with 3.5 percent downpayment will reach 78% LTV in aroundÂ 11 years. A 15-year fixed with 3.5 percent down would reach 78% LTV in aroundÂ two years.
So, for homeowners with a mortgage from June 2013 or earlier, one option to end FHA MIP is to just wait it out. Eventually, mortgage insurance ends.
Or, you can take matters into your own hands.
Remember: U.S. home values have been rising since 2011, raising the amount of home equityÂ FHA-backed homeowners have in their properties. What was once a 3.5% equity stake is now often 5%, 10%, or higher.
FHA homeowners areÂ refinancing awayÂ from the FHA.
Many FHA homeowners haveÂ used today's market to switch from an FHA loan to aÂ conventional home loan instead, using theÂ re-release ofÂ Conventional 97 to their advantage orÂ the introduction of the HomeReadyâ„˘ home loan which requires just home equity of just 3 percent.
Taking a conventional loan can be muchÂ cheaper as compared to an FHA one.
There are two reasons why:
For homeowners withÂ 5% equity or more, the improvement is evenÂ more stark. This is because mortgage insurance premiums forÂ a conventional loan dropÂ as a home's LTV drops.
With an FHA loan, MIP is the same for everyone. So, for today's homeowners with FHA loans, the best refinance option may be to leave the FHA altogether.
Refinance your FHA loan into a conventional one.
You don't have to pay FHA MIP forever. You have the right to request a refinance and, with mortgage rates low, it's a good time to exercise that option.
Get today's live mortgage rates now. Your social security number is not required to get started, and all quotes come with access to your live mortgage credit scores.Click to see today's rates (Feb 8th, 2016)
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
Felicia M. Law Enforcement
The Mortgage Reports has been a valuable asset to me. I love that each topic is fully explained in terms that can be easily understood. I've learned more from this web site than from any first-time buyer education class.
Thaddeus C. Systems Analyst
I am an aspiring homeowner and The Mortgage Reports helps me daily. Thank you for your excellent information.
Mohammed Y. Retired
The Mortgage Reports is informative and I read it daily. I am grateful for the knowledge I have gained.
2016 Conforming, FHA, & VA Loan Limits
Mortgage loan limits for every U.S. county, as published by Fannie Mae & Freddie Mac, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA)