If you’re looking for ways to make your dreams of homeownership come true, you’ve likely come across FHA loans, which are backed by the Federal Housing Administration.
The big draws for FHA loans are the low down payment and credit score requirements — 3.5% down for borrowers with credit scores of 580 or higher.
But those requirements come with a trade-off: FHA loan mortgage insurance.
The mortgage insurance premium (MIP) is what allows the FHA to back these loans for borrowers who may not qualify for conventional loans. It adds to the cost of the mortgage, though, and most FHA borrowers will pay MIP for the life of the loan.
MIP is a good thing, since it can help you get a house sooner than you might otherwise. But it’s important to understand how much you’ll be paying and what your obligations are.
What's in this Article?
Mortgage insurance is a premium borrowers pay as part of their monthly mortgage payments. The insurance protects lenders from losing money if borrowers fall behind on payments or go into foreclosure.
Typically, mortgage insurance applies to loans in which borrowers put down less than 20%. Why? Because small down payments mean larger loans — the lender is putting more money into the home upfront, and the borrower has little equity.
The lender is taking on much of the risk, a very good thing for the buyer.
That’s why mortgage insurance doesn’t just benefit lenders. It allows borrowers who can afford a monthly mortgage payment but can’t save up the traditional 20% down payment to purchase a home.
By taking advantage of a loan with mortgage insurance, you might qualify years earlier than expected, and those years translate to equity built up in the home. And since home equity is crucial to building wealth in the U.S., mortgage insurance is an important tool that helps more borrowers onto that path.
Related reading: FHA Loan Requirements 2021 | Rates & Eligibility
Although several loan programs have mortgage insurance, the requirements are not all the same.
FHA loans: FHA loans have an upfront and annual mortgage insurance premium (MIP). The annual MIP is adjusted every year based on your remaining loan balance.
Conventional loans: Borrowers who put down less than 20% on a conventional loan (which is the majority of borrowers these days) pay annual private mortgage insurance (PMI).
USDA loans: Like FHA loans, USDA loans have an upfront and annual mortgage insurance requirement.
VA loans: There is no annual mortgage insurance requirement on VA loans, but there is an upfront funding fee, which is charged as a percentage of the loan.
There is no PMI on an FHA loan — only the upfront and annual MIP fees. It’s easy to confuse the two, but they’re quite different.
PMI applies to conventional loans. You can remember this by knowing its full name: “private mortgage insurance.” PMI is for “private” – i.e. non-government – loans. FHA mortgage insurance, on the other hand, is the government’s “brand” of PMI.
Another difference is that conventional loans typically do not come with an upfront and monthly PMI charge, only a monthly one. And it’s only required if you put down less than 20%. The PMI requirement can fall off when you have 20% equity in the home.
MIP, or “mortgage insurance premium”, is for FHA loans. There is an upfront MIP fee, which you can pay at closing or roll into the loan, as well as an annual MIP fee. The upfront fee is 1.75% of the loan, and the annual rate is assessed every year based on your loan balance.
However, most lenders will set up the annual amount, divide it by 12, and collect it as part of your monthly payment. The monthly payment goes into an escrow account that pays off the MIP fee at the end of each year. This allows borrowers avoid paying an annual lump sum.
Here’s an example of how PMI and MIP affect mortgage payments over the life of a $300,000 loan:
The rates for PMI and MIP are also calculated differently. PMI depends on factors such as down payment and credit score, while annual MIP depends on your home’s purchase price and your down payment.
As if there weren’t enough nearly identical acronyms, there’s also MPI, or mortgage protection insurance. MPI is a type of insurance that a borrower can purchase to pay off their mortgage in the event of their death.
This is an optional insurance policy. Funds received after a claim go directly to the lender to pay off the mortgage when the insured person passes away.
Lenders do not require MPI. It’s solely to provide the homeowner’s family with peace of mind that they will be able to remain in the home and avoid foreclosure.
The upfront mortgage insurance premium is 1.75% of the loan amount, or $1,750 for every $100,000 borrowed.
The annual premium rate is based on your loan amount and down payment. Those factors also determine how long you’ll owe MIP.
Most FHA borrowers put down less than 10% and will pay annual MIP between 0.80% and 0.85%. But those who put down 10% or more will only pay annual MIP for 11 years, after which the MIP requirement ends.
Annual MIP is divided into 1/12th payments that are included in your monthly mortgage installments.
MIP rates for a 30-year FHA loan
|Loan amount||Down payment||MIP per year||How long you’ll pay|
|$625,000 or less||Less than 5%||0.85%||Life of the loan|
|$625,000 or less||5% – 9.99%||0.80%||Life of the loan|
|$625,000 or less||10% or more||0.80%||11 years|
|Greater than $625,000||Less than 5%||1.05%||Life of the loan|
|Greater than $625,000||5% – 9.99%||1%||Life of the loan|
|Greater than $625,000||10% or more||1%||11 years|
Bolded row is the most common scenario for FHA buyers
MIP rates for a 15-year FHA loan
|Loan amount||Down payment||MIP per year||How long you’ll pay|
|$625,000 or less||Less than 10%||0.70%||Life of the loan|
|$625,000 or less||10% or more||0.45%||11 years|
|Greater than $625,000||Less than 10%||0.95%||Life of the loan|
|Greater than $625,000||Between 10% and 22%||0.70%||11 years|
|Greater than $625,000||22% or more||0.45%||11 years|
If you purchased a home for $200,000, here’s what your MIP costs might look like for the first year.
|Base loan amount||$193,000|
|Annual MIP||$1,668 ($139 a month)|
FHA guidelines allow you to roll the upfront MIP into your loan. If you choose this option, your total loan amount would be $196,378.
Upfront MIP can also be included in your closing costs. You can pay those from your savings, or from closing cost assistance funds if you qualify for a state or local assistance program.
You can look up homebuying assistance programs through the U.S. Department of Housing and Urban Affairs (HUD) website, and by Googling “closing cost assistance programs in [enter your city, state, and county here].”
All FHA loans require upfront MIP and an annual premium for at least part of the loan. But there are ways to limit your MIP costs.
If you can afford it, consider putting 10% down. Although the minimum down payment for an FHA loan is 3.5%, a larger one could mean you’ll only pay MIP for 11 years and significantly reduce the overall cost of your home loan.
However, most people refinance out of FHA MIP into a conventional loan after a few years anyway. Few keep paying MIP until it drops off after year 11. So from a mortgage insurance perspective, it often doesn’t make sense to make a large down payment on FHA.
If you can’t afford a 10% down payment, don’t let MIP put you off FHA loans. It’s better to take the 3.5% down option and pay MIP while building equity than to delay homeownership — and the associated wealth-building opportunities — for several years. A smaller down payment can keep your emergency fund intact, too.
If you’re determined to limit MIP, you could opt for a lower-priced property, which means you’ll need less money to hit the 10% down mark.
Even if you choose to put 3.5% down, a lower purchase price means a lower loan — which means you’ll pay less in MIP as a percentage of the loan.
The PMI requirement on conventional loans ends once you have 20% equity in the home. FHA borrowers who have 20% equity or higher can refinance to a conventional loan to stop paying mortgage insurance.
The closing costs on a refinance loan can total several thousand dollars, so it’s worth figuring out how much you’ll save versus how much you’re spending on the new loan to make sure it’s worth it. If interest rates rise between the time you take out the FHA loan and when you want to refinance, that increase could offset any savings you’d get from removing MIP.
Other federally-backed government loans have lower mortgage insurance requirements.
If you are a member of the military community — including a veteran, active-duty servicemember, or surviving spouse — you may qualify for a 0% down VA loan. These home loans, which are backed by the U.S. Department of Veterans Affairs (VA), only requires an upfront funding fee. They do not have ongoing mortgage insurance.
The funding fee for first-time VA borrowers who don’t make a down payment is 2.3%. Borrowers who have service-related disabilities may be exempt from the funding fee.
Learn more about the VA funding fee in our guide: Absolutely Everything You Need to Know About the VA Home Loan in 2021
USDA loans, which are backed by the U.S. Department of Agriculture (USDA), include both an upfront and ongoing mortgage insurance fee, similar to MIP.
However, the USDA mortgage insurance rates are lower:
- Upfront: 1%
- Annual: 0.35%
USDA mortgages are only available to those who earn less than 115% of the area median income and are buying a home in a qualifying rural or suburban area.
Learn more: USDA Loans: A Zero-Down Loan for the Suburbs
FHA loan mortgage insurance FAQs
Existing FHA homeowners can refinance an FHA loan into a new conventional loan to get rid of mortgage insurance.
Once you think you have around 20% equity in the property, call a lender and apply for a conventional refinance.
The lender will take your application, and if approved, will order an appraisal. If the appraisal shows you have adequate equity, you’ll go forward with your zero-PMI conventional loan.
Keep in mind that there are costs to refinancing. Ask your lender if they think your home will appraise at a high enough value to get rid of PMI before getting too far into the refinance.
Check with a lender on your conventional refinance eligibility here.
MIP is required for the life of the loan if you put down less than 10%. If you put down 10% or more, the MIP requirement ends after 11 years.
However, many homeowners refinance out of FHA into a conventional loan when they reach 20% equity, which can happen after a few years, depending on the market.
Sometimes mistakenly referred to as PMI for FHA loans, the FHA mortgage insurance premium (MIP) is charged as an upfront and an annual premium. The upfront MIP fee is 1.75% of the loan (which can be rolled into the mortgage), and the annual fee is 0.85% on most FHA loans, paid in 1/12 installments each month. That comes out to about $71 per month per $100,000 in loan amount.
The idea of mortgage insurance can seem off-putting, but remember that it can actually help you get into a home sooner than you think. Sure, it’s an extra cost. But you have to weigh that against the equity you could be building if you decide to buy now rather than waiting to save up 20%.
Plus, there are ways to minimize your mortgage insurance payments so that homeownership becomes even more affordable.
If you’re ready to become a homeowner, the next step is to speak with a knowledgeable mortgage lender who can explain your loan options — including mortgage insurance and other details.
Fairway is not affiliated with any government agencies. These materials are not from the VA, HUD, FHA, USDA, or RD, and were not approved by a government agency.
Some references sourced within this article have not been prepared by Fairway and are distributed for educational purposes only. The information is not guaranteed to be accurate and may not entirely represent the opinions of Fairway.