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 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 belongs to you. You can rid yourself of FHA MIP via a refinance and, as home values have climbed since 2011, that's exactly what FHA-backed homeowners have done.
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 .
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, 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 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.
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 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 are just 0.55%, which can lower the "effective" mortgage rate of an FHA loan by as much as 100 basis points (1.0%).
For grandfathered loans, premiums are the same across all 15-year and 30-year mortgages, regardless of LTV.
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 it out.
First, let's talk about homeowners with an FHA mortgage pre-dating June 3, 2013. For these homeowner, 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 downpayment 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 are refinancing away from the FHA. Many FHA homeowners have used today's market to switch from an FHA loan to a Fannie Mae or Freddie Mac loan instead.
And now, with the re-release of Conventional 97, all you need is 3% equity.
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.
Conventional mortgage rates are the lowest they've been since May 2013. And, over the same period of time, U.S. home values are up by as much than 15%.
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.
FHA mortgage rates are low but MIP tends to be costly -- and permanent. Thankfully, you have options. Loans which pre-date June 1, 2009 can use the FHA Streamline Refinance to "grandfather in"; and everyone else can look at a refinance.
Get a complimentary conventional mortgage rate quote today. Rates are available at no cost and with no obligation to proceed. Your social security number is not required to get started.
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.
Barry L. Systems Analyst
The Mortgage Reports is an excellent resource. I depend on the Mortgage Reports for the most up-to-date information regarding shifts in government policy and mortgage rate information in general.
The Mortgage Reports is invaluable. It's our primary source for information on housing finance.
Ricardo P. Project Manager
The Mortgage Reports is awesome. The site is extremely helpful, keeps you up-to-date, and puts you ahead of the game. Add The Mortgage Reports to your reading list!
2015 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)