All about FHA PMI
( or FHA MIP, more accurately )
Most people refer to it as PMI, which is short for Private Mortgage Insurance. The truth of the matter is that when speaking in regards to an FHA mortgage in particular, it is actually MIP, or Mortgage Insurance Premium.
“Private” mortgage insurance (PMI) polices are used for conventional mortgages with less than 20% down, while MIP is a premium charged specifically on FHA loans to insure against the borrower’s (yours) default (non-payment) on the mortgage.
FHA PMI is a necessary evil.
It allows banks to issue low down-payment FHA loans to borrowers that otherwise wouldn’t qualify under the more stringent conventional lending guidelines. Without having an insurance against people not making their payments, banks would not give loans with such little down payments as 3.5%, thereby eliminating a huge portion of the home buyer’s market right now.
OK, back to the FHA Mortgage Insurance premiums…
There is an up-front premium to be paid and a monthly (or more accurately, annual) as well. Currently, the up-front FHA MIP for new, 30 year FHA loans with 3.5% down is 1.75% of the loan amount. The annual MIP factor would be 1.25% of the loan amount. So, for example, on a $200,000 loan amount you would pay $3,500 (200,000 x .0175) up-front MIP at closing. In addition, there would be an MIP premium added onto your monthly mortgage payments of $208.33 (200,000 x .00125 annual MIP / 12 months in a year). These are standard fees and set forth by FHA themselves, they do not vary from FHA lender to FHA lender.
How to Get Rid of it!
OK, now that we have a pretty good idea what it is and why we need it, how can we avoid it?!
Well, as of right now, you could get a 15 year FHA mortgage and put 22% down and avoid mortgage insurance altogether, but even that changes in June (click here for more information of the FHA increases for April 1, 2013 and June 3, 2013). Besides that, most all FHA loans start with MIP, so the real question you should be asking is how can I get rid of it?!
The best thing about FHA mortgage insurance is that it’s automatically cancelled once your loan reaches 78% loan-to-value ratio!
For example, if your loan balance reaches $78,000 and your original purchase price or appraised value was $100,000 when you got the loan. Sounds awesome, right?
The catch is, that on 30 year FHA loans, there is a 60 month minimum requirement, meaning you have to pay mortgage insurance for a minimum of 5 years!
On a typical 30 year FHA loan with a 3.5% down payment and no additional payments made, it would take a little less than 9 years to reach that point.
Tips to avoid unnecessary FHA Mortgage Insurance Premiums
- Switch to a biweekly payment plan once your new loan is originated; this will shave 2 years off the previous calculation and make the 78% point around 7 years!
- Think about a 15 year loan. Until June of this year, if you get a 15 year FHA mortgage and put 22% down, you can avoid FHA MIP altogether!
- Take a ‘conventional’ approach by comparing an FHA loan with other low down payment conventional options. They can go as little as 3 or 5% down and almost always have lower mortgage insurance premiums. (These are typically harder to qualify for and may require a stronger credit profile, but a lot of people are getting approved lately)