When you get an FHA loan you are required to pay mortgage insurance. There is an up-front mortgage insurance premium (UFMIP) and a monthly mortgage insurance (MIP) too. Today, we’re talking about FHA’s monthly mortgage insurance premium (MIP) but if you’re curious about how the up-front mortgage insurance works you can check out our previous post covering all the details.
The cost of your monthly mortgage insurance will depend on a few factors, including your loan amount, down payment, and the length of your mortgage.
The cost of FHA monthly mortgage insurance is 0.85% for a 30 year fixed, with 3.5% down and loan amount of less than or equal to $625,500, but there are a few factors to consider and be aware of that could save you some money.
Let’s get moving…
FHA monthly Mortgage Insurance Premium Chart
The United States Department of Housing & Urban Development (HUD) publishes the FHA Single Family Housing Policy Handbook which provides lenders with all the rules associated with FHA. Included in this Handbook is an FHA mortgage insurance table to explain the cost of mortgage insurance on an FHA loan based on the various factors including your loan amount, down payment, and the length of your mortgage.
Here is the FHA mortgage insurance chart for a 30 year term mortgage for base loan amounts of $625,500 or less:
| Loan-to-Value | MIP (%) | Length MIP to be Paid |
|---|---|---|
| ≤ 90.00% | 0.80% | 11 years |
| > 90.00% but ≤ 95.00% | 0.80% | Full mortgage term |
| > 95.00% | 0.85% | Full mortgage term |
What this FHA MIP matrix shows is that an FHA 30 year term mortgage with the minimum down payment of 3.5% will have a MIP rate of 0.85% and must be paid for the entire length of the mortgage (until paid off, sold or refinanced).
15 Year Term
If you are looking at an FHA 15 year term mortgage then here is what the FHA MIP chart looks like for base loan amount os $625,500 or less:
| Loan-to-Value | MIP (%) | Length MIP to be Paid |
|---|---|---|
| ≤ 90.00% | 0.45% | 11 years |
| > 90.00% | 0.70% | Full mortgage term |
How to Avoid Paying FHA Mortgage Insurance for the Entire Term
Maybe you already noticed from the charts provided, but there is really just one way to avoid paying FHA mortgage insurance for the full length of your mortgage. That’s to put more money down.
You have to put 10% down, or more, to avoid paying monthly mortgage insurance for the full term on an FHA mortgage.
Calculating FHA MIP
Now that you can see how much FHA mortgage insurance will cost in terms of a percentage you’re probably wondering how that is used to calculate what you’ll pay, right?
Well, the chart shows you the cost of mortgage insurance on an annual basis, not monthly. That’s the first clue on how to calculate FHA mortgage insurance.
The next clue in calculating monthly FHA MI is that you only pay the monthly (or now what you know to be annual) mortgage insurance premium on the base loan amount.
The last clue in our math problem here is to know that the amount of mortgage insurance is based on the current balance, which means as your balance goes down with regular monthly payments, so does your mortgage. Yep…your FHA mortgage insurance costs goes down over time.
The Math
Let’s start with a simple example on a 30 year fixed rate mortgage…
$400,000 Purchase Price
3.5% Down Payment ($14,000)
$386,000 Base Loan Amount
1.75% UFMIP = $6,755 (financed)
$392,755 Full Loan Amount
FHA MIP = 0.85%
= $386,000 x 0.85%
= $3,281.00/year
= $273.42/mo
Pretty simple, now that you know how it all works. But what if you want to know what the MI will be after 5 years from now?
If we assume a 3.5% rate just for illustration purposes then the following will provide you with a close estimate of the MI premium at that point in time:
(the actual calculation is quite complex – check it out)
If you’ve made your minimum payments over 5 years your remaining balance would be $351,553.60.
$351,553.60 x .085% = $2,988.21/year
But that is based on the full loan amount. To get the calculation based on the base loan amount we simply divide that amount by 1 + UFMIP % which in our example is 1.75%.
$2,988.21 / (1 + .0175) = $2,936.82/year
Now we just divide this by 12 to get our estimated monthly MI amount:
$2,936.82 / 12 months = $244.74/mo
So, there you have it. That’s how FHA mortgage insurance works, how to calculate the MI amount and when it drops off.
