FHA Upfront Mortgage Insurance Premium (MIP)
The FHA loan insurance program was created to help first-time buyers get into homes. However, first-time buyers usually don't have 20% down payments and may have a spottier credit history. In order to provide protect taxpayers from paying for defaulted FHA mortgages, the loans include mortgage insurance premiums (MIP).
The FHA Mortgage Insurance Premium
FHA mortgage insurance is similar to the private mortgage insurance (PMI) required for conventional mortgages with down payments below 20%, but there are some key differences.
Up-front fees: Unlike the traditional PMI, the FHA MIP currently requires an up-front fee at time of closing. The fee is usually included in the loan, so you pay it over the life of the loan.
Rate: The FHA MIP is also mandated at a percentage of the loan amount per year, divided over 12 months. PMI rates are also usually .5% divided over 12 months, but the rates do vary by lender.
Removal: Unlike PMI, the FHA MIP is mandatory for the first five years of loans with terms of more than 15 years, even if your loan balance reaches 78% of the original home value or sales price. PMI premiums can often be removed if the loan balance is below 80% of the current market value. Conventional lenders are required to automatically remove PMI when the loan balance falls to 78% of the original loan amount.
Exceptions: There are some exceptions to the mandated FHA mortgage insurance premium. If you have a loan term of 15 years or less AND put down 10% or more, the MIP will be cancelled when the loan balance is 78% of the original appraised value or original sales price, whichever is less. If you pay 20% down on a 15-year loan, you won't be required to pay the MIP.