Fha Mortgage Insurance Premium

The Federal Housing Administration, or FHA, is a dream for first-time home buyers. Whereas a conventional mortgage requires a 20% down payment, FHA mortgages have a 3.5% down payment requirement. Refinancing an FHA mortgage is also easier than refinancing another mortgage loan.

But all of these benefits aren't without their costs. One disadvantage to the low down payment is the high price of mortgage insurance. And premiums will fall on Jan. 26, 2015. Here's what you should know.

1. Upfront mortgage insurance bites -- hard!
The FHA requires borrowers to pay an upfront mortgage premium (also known as UFMIP) equal to 1.75% of the loan amount. Fortunately, borrowers aren't required to pay in cash. The premium is simply rolled into the mortgage amount.

Thus, if you borrow $100,000 to buy a home, your loan amount would be $101,750 to factor in the upfront mortgage insurance premium. The premium is intended to protect the lender in the event you cannot afford your home in the future, since the 3.5% down payment requirement leaves little protection for the lender.

2. Monthly insurance premiums add up
In addition to an upfront mortgage insurance premium, you'll also be on the hook for an ongoing mortgage premium that is added to your monthly payment. This mortgage insurance premium varies as a percentage of your loan balance, depending on your mortgage's duration and loan-to-value ratio.

Here are the current premiums for 30-year mortgages:

Amount Borrowed

Loan to Value Ratio

Current Rate

New Rate (in effect Jan. 26, 2015)

$625,500 or less

95.01% or more

1.35%

0.85%

$625,500 or less

95% or less

1.30%

0.80%

Greater than $625,500

95.01% or more

1.55%

1.05%

Greater than $625,500

95% or less

1.50%

1.00%

Prior to the announced reduction in 30-year insurance premiums, many borrowers opted for a 15-year mortgage, as insurance was significantly less expensive. That gap will narrow starting on Monday, Jan. 26, and the choice may not be as clear as it once was. (Luckily, 15-year interest rates are almost always lower than rates on 30-year mortgages.)

Here's the table for 15-year FHA mortgage insurance premiums:

Amount Borrowed

Loan to Value Ratio

Current Rate

$625,500 or less

78.01%-90%

0.45%

$625,500 or less

Greater than 90%

0.70%

Greater than $625,500

78.01%-90%

0.70%

Greater than $625,500

Greater than 90%

0.95%

Keep in mind that if and when mortgage premiums change, they do not change for existing borrowers. Everyone who closed on their loan prior to the reduction in premiums will continue to pay the old rate.

The only way to get the new, lower rate would be to refinance, something that may not be economically feasible given that closing costs can easily outweigh the benefit of a half percentage point reduction in insurance premiums.

3. Borrowers have to pay mortgage insurance premiums longer than ever before
Recently reduced mortgage insurance premiums aren't exactly a free lunch. Thanks to previous changes to the FHA program, borrowers now have to pay mortgage insurance premiums longer than ever. 

The length of time on which you'll pay mortgage insurance premiums on your FHA loan is as follows:

Mortgage Term

Loan to Value Ratio

Length of Mortgage Premium

15 years or shorter

Up to 90%

11 years

15 years or shorter

Greater than 90%

Full loan term

Greater than 15 years

Up to 90%

11 years

Greater than 15 years

Greater than 90%

Full loan term

Source: HUD.gov.

New buyers save big
For new buyers, lower mortgage premiums starting on Jan. 26 will result in significant savings. The reduction will result in $1,000 in first-year savings on a 30-year mortgage of $200,000. That's roughly equivalent to one mortgage payment per year at current mortgage rates. Whether or not it brings new buyers to the real estate market is something that remains to be seen.

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