Understanding the FHA Mortgage Insurance Premium (MIP)

* Disclaimer – all information in this article is accurate as of the date this article was written *

Orange County home buyers have heard of the FHA loan program. But what about the MIP? The FHA Mortgage Insurance Premium is an important part of every FHA loan.

There are actually two types of Mortgage Insurance Premiums associated with FHA loans, which Orange County Home buyers need to be aware of:

1.  Up Front Mortgage Insurance Premium (UFMIP) – financed into the total loan amount at the initial time of funding.

2.  Monthly Mortgage Insurance Premium – paid monthly along with Principal, Interest, Taxes and Insurance

Conventional loans that are higher than 80% Loan-to-Value also require mortgage insurance, but at a relatively higher rate than FHA Mortgage Insurance Premiums.

Mortgage Insurance is a very important part of every FHA loan since a loan that only requires a 3.5% down payment is generally viewed by lenders as a risky proposition. Can you imagine being able to purchase an Orange County home for $700,000 with only a 3.5% down payment andthe lender not needing some type of insurance?

Without FHA around to insure the Orange County FHA lender against a loss if a default occurs, high LTV loan programs such as FHA would not exist.

Calculating FHA Mortgage Insurance Premiums:

Up Front Mortgage Insurance Premium (UFMIP)

UFMIP varies based on the term of the loan and Loan-to-Value.

For most FHA loans, the UFMIP is equal to 1%  of the Base FHA Loan amount (Effective October 5, 2010).  *updated October 5, 2o10

For Example:

>> If John purchases an Orange County home for $400,000 with 3.5% down, his base FHA loan amount would be $386,000

>> The UFMIP of 1% is multiplied by $386,000, equaling $3,860

>> This amount is added to the base loan, for a total FHA loan of $389,860

Monthly Mortgage Insurance (MMI):

  • Equal to .90% of the loan amount divided by 12 – when the Loan-to-Value is greater than 95% and the term is greater than 15 years *updated Oct 5, 2010
  • Equal to .85% of the loan amount divided by 12 – when the Loan-to-Value is less than or equal to 95%, and the term is greater than 15 years *updated Oct 5, 2010
  • Equal to .25% of the loan amount divided by 12 – when the Loan-to-Value is between 80% – 90%, and the term is greater than 15 years
  • No MMI when the loan to value is less than 90% on a 15 year term

The Monthly Mortgage Insurance Premium is not a permanent part of the loan, and it will drop off over time.

For mortgages with terms greater than 15 years, the MMI will be canceled when the Loan-to-Value reaches 78%, as long as the borrower has been making payments for at least 5 years.

For mortgages with terms 15 years or less and a Loan -to-Value loan to value ratios 90% or greater, the MMI will be canceled when the loan to value reaches 78%.  *There is not a 5 year requirement like there is for longer term loans.

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