The mortgage insurance premium is an issuance policy attached toÂ FHA loans with down payments of less than 20%. FHA mortgage insurance premiums are in two phases -- 1) upfront at closing, and 2) annually in 12 monthly installments. The current upfront MIP fee is 1.75% of the borrowed amount; and, the typical annual MIP fee is 0.85% of the borrowed amount.
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 (May 30th, 2016)
The trick to getting rid of FHA mortgage insurance is to get rid of your FHA loan. And, with home values up and current mortgage rates down, there are millions of U.S. homeowners "in the money" to refinance their FHA MIP away.
If you're paying FHA mortgage insuranceÂ each month and think you're paying too much, consider your home loan refinance options.
Your FHA MIP obligation could be endedÂ within the next 30 days.Click to see today's rates (May 30th, 2016)
The Federal Housing Administration's 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: The Federal Housing Administration 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 Administration 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).
All 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. 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 is exactly what FHA-backed homeowners have chosen to do.Click to see today's rates (May 30th, 2016)
Current FHA upfront mortgage insurance premiums areÂ 1.75 percent of theÂ loan size. Â 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% down payment on your purchase, add the UFMIP to your borrowed amount, and still meet the FHA's minimum down payment 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 refund on your "unused" MIP portion. The refund is based on your original Upfront MIP payment, and decreases by 2 percentage points annually until no money remains to be refunded.Click to see today's rates (May 30th, 2016)
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% down payment:
FHA borrowers can also expect an additional 0.25 percentage point premium on loans which exceed $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.Click to see today's rates (May 30th, 2016)
The Federal Housing Administration's 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 .
FHA MIP has changed 7 times in seven years for FHA purchase loans and for many of the FHA-backed refinances.
However, there is a group of current FHA homeowners for whom 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 refinance for cheap.
For such "grandfathered" borrowers, upfront mortgage insurance premiums are just 0.01%, or $10 per $100,000 borrowed. 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 (May 30th, 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 that FHA mortgage insurance is never permanent.
You can always ask to refinance out.
First, let's talk about homeowners with an FHA mortgage 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, a 30-year FHA mortgage with 3.5 percent down payment will reach 78% LTV in around 11 years. A 15-year fixed with 3.5 percent down would reach 78% LTV in around 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 equity 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 much cheaper as compared to an FHA one.
There are two reasons why:
For homeowners with 5% equity or more, the improvement is even more stark. This is because mortgage insurance premiums for a conventional loan drop 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.Click to see today's rates (May 30th, 2016)
You can refinance an FHA loan with any FHA-approved lender, including your current FHA lender. However, it's always smart to get at least two mortgage quotes on a refinance because mortgage rates and closing costs vary from bank-to-bank. Your best "deal" may come from a new lender.
Whether you choose to do anÂ FHA Streamline Refinance of your existing FHA loan, or a conventional mortgage refinance, make sure to tell the lender that your existing loan is with the FHA and that you want to get rid of your FHA mortgage insurance.
The costs to refinance a mortgage vary by lender, which is why it's always a good idea to get multiple mortgage rate quotes when you're looking to do a refinance. Furthermore, closing costs vary by state, so where you live affects how much you pay.
That said, as the customer, it's your right to ask the bank for a reduced-cost or zero-closing cost mortgage refinance, if you'd prefer to pay as few closing costs as possible.Â In general, assuming a loan size of at least $250,000, a lender cover your closing costs for you so long as you accept a 25 basis point (0.25%) increase to your mortgage rate.
When you do a zero-closing cost refinance, you won't get the absolute lowest mortgage rate available, but you won't have to raise your loan balance, either. For many borrowers, this is an excellent trade-off.
MIP and PMI serve the same purpose -- each protects the lender against homeowner default. The main difference between aÂ mortgage insurance premiumÂ and private mortgage insurance, then, is justÂ the insurer.
MIP stands for Mortgage Insurance Premium, and MIP is paid to the federal government. PMI stands for Private Mortgage Insurance, and PMI is paid to private mortgage insurers. Some of the larger private mortgage insurers include MGIC, Radian, and United Guaranty.
This is different from private mortgage insurance (PMI), which is mortgage insurance paid to private mortgage insurers and typically associated with conventional mortgage financing.
Private mortgage insurance premiums vary from loan-to-loan, taking into account a homeowner's down payment, its credit score, its state of residence, and even its loan term.
Another area where MIP and PMI differ is with respect to mortgage insurance cancelation. PMI from private mortgage insurers ultimately cancels in time. FHA mortgage insurance, however, does not.
2016 FHA mortgage insurance rates vary by loan traits. For example, if you're using a 30-year fixed rate mortgage and making a downpayment of 3.5%, you'll payÂ 85 basis points per year, or 0.85% of your borrowed amount. If your downpayment exceeds 3.5 percent, your mortgage insurance premium drops to 80 basis points per year.
For borrowers using 15-year fixed rate loans, 2016 FHA MIP is 70 basis points for loans with less than ten percent down payment. BorrowersÂ putting more than ten percent down with a 15-year fixed rate mortgage pay FHA MIP at a rate of 45 basis points annually.
All FHA borrowers are required to pay an upfront mortgage insurance premium at closing. This amount is added to your loan balance and can be partially refunded in the future via anÂ FHA Streamline Refinance.
For homeowners with FHA mortgages that pre-date June 2013, FHA mortgage insurance cancels as soon as loan-to-value reaches 78% and 60 months have passed since the loan's inception. For everyone else,Â FHA mortgage insurance lasts for as long as theÂ loan exists. You cannot cancel FHA MIP directly. To remove FHA mortgage insurance, you can refinance into another loan type which doesn't require "permanent MIP".
Mortgage insurance is required for all FHA loans. This has been FHA policy since 2013. However, as an FHA borrower, you are entitled to a refund of a portion of your MIP paid so long as you refinance using theÂ FHA Streamline Refinance program during your loan's first 36 months.
The choice to pay annual MIP or monthly MIP is a personal one and neither should be consider "better". Speak with your loan officer about the benefits of each.
There are alternatives to the FHA loan, but none will doÂ exactly what the FHA loan can do. For example, the FHA loan allows borrowers with a below-average credit score to purchase a home with 3.5% downpayment at very low mortgage rates.
Other programs exists with similar appeal, however, none are government-backed which means that FHA mortgage rates are likely to be better than any available alternate.
That said, if you are a military borrowers and eligible to use the VA Home Loan Guaranty program, you may find the VA mortgage to be a viable FHA alternative. VA loans don't require mortgage insurance.
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 (May 30th, 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.
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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)