Mortgages & Financing
How does mortgage insurance work on an FHA loan?
By Steve Lockhart
The short answer
The FHA mortgage insurance premium, or MIP, works differently from conventional PMI. It has two parts: an upfront premium of about 1.75 percent of the loan, which you can finance into the balance rather than pay at closing, and an annual premium collected in monthly payments, which on most 30 year loans runs between about 0.5 and 1 percent of the loan per year.
Full answer
The FHA mortgage insurance premium, or MIP, works differently from conventional PMI. It has two parts: an upfront premium of about 1.75 percent of the loan, which you can finance into the balance rather than pay at closing, and an annual premium collected in monthly payments, which on most 30 year loans runs between about 0.5 and 1 percent of the loan per year. The annual premium attaches to the loan in a way that is hard to cancel: with less than 10 percent down it stays for the life of the loan, and with 10 percent or more down it drops after roughly 11 years, depending on the program rules in force at the time. Because of that, many FHA buyers blend the low down payment benefit now with a plan to refinance into a conventional loan once the equity grows, which removes the premium. That is not a loophole, it is the standard second step, and we price the premium into the payment from the very first number.
Go a little deeper
Frequently asked
Questions people often follow up on
Can I finance the upfront FHA premium into the loan?
Yes, the upfront premium is typically financed into your loan balance, which keeps more cash at closing though it grows the amount you borrow. Your lender shows the cash version and the financed version, so you decide with both numbers in front of you.
Does FHA mortgage insurance ever drop off?
On many 30 year FHA loans with less than 10 percent down, the premium lasts for the life of the loan, and with 10 percent or more down it can be removed after roughly eleven years. The rules have changed over the years, so we confirm the current terms for your down payment and loan date with the lender.
Can I remove the FHA premium by building equity?
Not by calling the lender the way a conventional PMI can be dropped; FHA rules tie the premium to the loan. The common path is refinancing into a conventional mortgage once your equity supports it, which removes the premium and lowers the payment. That exit is part of the plan from day one.
The Lockhart Method
The Lockhart Method
Your Home | My Strategy | Proven Results
My strategy: when FHA is the right entry, we treat the insurance premium as part of the monthly reality and build the exit, the refinance, into the plan from day one. The low down payment and the later conventional switch are one coordinated path, not two separate hopes.
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