Posted September 11, 2014Tweet
Federal Housing Administration (FHA)-backed loans are popular with home buyers and refinancing homeowners for multiple reasons, including:
However, one place FHA mortgages can fall short 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 need to be a permanent condition, however. Millions of U.S. homeowners are currently "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 completed within the next 30 days.
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 a 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 which 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 pay both insurance types and for most FHA homeowners, FHA MIP is lasts for the life of the loan.
As a homeowner, though, your mortgage belongs to you. You can always ask to refinance your FHA MIP away and, as home values have climbed since 2011, that's exactly what FHA-backed homeowners have been doing.
Get rid of your FHA MIP via a refinance. Click here to get started.
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 of October 29, 2014.
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 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.
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. Annual FHA MIP rates are as follows:
FHA borrowers can also expect an additional 0.25 percentage point premium on loans exceeding $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.
Also, note that first-time homebuyers using the FHA HAWK program -- Homeowners Armed With Knowledge -- get access to FHA MIP discounts of 50 basis points off upfront MIP and up to 25 basis points on annual MIP.
FHA MIP has increased 6 times in seven years on FHA purchase loans and 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 refinance for cheap.
For such "grandfathered" borrowers, upfront mortgage insurance premiums drop for 1.75 percent to just 0.01%, or $10 per $100,000 borrowed.
Furthermore, for eligible borrowers, annual MIP rates drop from a maximum of 1.55 percent to just 0.55%, which lowers the "effective" mortgage rate of an FHA loan by a full percentage point. Premiums are the same across all 15-year and 30-year mortgages, regardless of LTV.
FHA mortgage insurance is never permanent. It can either go away on its own, or you can refinance it away.
For homeowners whose FHA mortgage pre-dates June 3, 2013, MIP goes away when certain conditions are met :
Homeowners should not 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.
For some quick math, a 30-year FHA mortgage with 3.5 percent downpayment will reach 78% LTV in roughly 11 years. By contrast, a 15-year fixed with 3.5 percent down would reach 78% LTV in just over two years.
You can take matters into your own hands, though, and end your MIP sooner.
Home values have been rising since 2011. As a result, FHA-backed homeowners now have higher levels of home equity and lower loan-to-values (LTV) than they did at the time of purchase. With lower LTVs, FHA homeowners have been able to refinance away from the FHA entirely and into some less expensive.
Many FHA homeowners are using today's market to switch to a Fannie Mae or Freddie Mac loan instead.
All you need is 5% equity.
With 5% equity, homeowners often find cheaper to be in a conventional one versus an FHA one.
For homeowners with more than 5% equity, 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, by comparison, MIP is the same for everyone.
Conventional mortgage rates are near 14-month lows and U.S. home values are up by as much than 20% since 2012. For homeowners with an FHA loan, the best refinance option may be to leave the FHA altogether.
Refinance your FHA loan into a conventional one.
FHA mortgage rates are cheap, but the associated premiums are not. FHA MIP can be costly and can add to your long-term housing costs. Thankfully, you have options.
Homeowners with FHA loans from May 31, 2009 or prior can use the FHA Streamline Refinance to get access to ultra-low rates and ultra-low premiums. It's a terrific deal for those who want it. Everyone else? Look to conventional loans where rates are low and premiums cheap.
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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2014 Conforming & FHA Loan Limits
Mortgage loan limits for every U.S. county,
as published by Fannie Mae & Freddie Mac, and the FHA.