Many people shy away from FHA loans because they fear the mortgage insurance premiums they must pay. While in most cases, there is no way around paying the FHA MIP rates, the good news is that the insurance premiums do not last forever and there are ways to get out of them after a while. If you need an FHA loan to help you become a homeowner because you do not have great credit; do not have a lot of money to put down; or because you need the waiver for the waiting period required for a bankruptcy or foreclosure, FHA loans are the way to go. Knowing what to expect with the MIP and how to get rid of it eventually will help you succeed even more.
What is MIP for FHA Loans?
FHA MIP is how the FHA stays in business. They are not the entity that funds your loan; they simply guarantee your loan. This means they give the lender a guarantee that if you were to default on your payments that they would reimburse the lender. This gives banks more incentive to give out loans, which in turn stimulates the economy. But, where does the FHA get the money from to back up these loans? They get it from their borrowers and the money they pay towards their MIP. This money goes into a reserve account which the FHA uses to pay banks back when borrowers default. As the reserve fund gets bigger, the FHA can reduce their rates, but as it decreases, they must increase their rates. The rates have changed many times before and can do so again in the future.
Types of FHA Mortgage Insurance
FHA MIP comes in two types: upfront mortgage insurance and annual insurance. The upfront portion is due at the closing either from your own funds or it can get rolled into the loan. The annual insurance premiums get paid on a monthly basis after the insurance premium is figured on an annual basis and then divided equally amongst the 12 months. The terms and rates vary depending on when you originated your loan as well as its term.
Upfront MIP Rates
The upfront mortgage insurance is 1.75 percent of your loan amount as of right now. This means that you pay this amount at the closing or roll it into your loan. Most people choose to roll it into the principal amount because it does not affect their LTV. You still put the same amount of money down for the down payment (3.5% of the purchase price) and nothing changes. The money is placed into the reserve account of the FHA and you never have to pay that amount again.
Annual MIP Rates
The annual rates are what people try to get around and are most concerned with paying. These rates depend on when you received the loan as well as its term.
If you obtained your original FHA loan prior to May 31, 2009, you are not subjected to today’s MIP rates. This means you get to “grandfather” your MIP rates into your new loan if you were to refinance today. Those rates are:
- .01 percent upfront
- 0.55 percent annually
These are the rates for all terms on all loans originated prior to May 31, 2009.
If you originated your loan after the above date, yet before June 3, 2013, you are subjected to different rates and conditions. Your annual MIP totals 0.85 percent of the loan amount.
These borrowers will pay today’s insurance rates, but have the ability to cancel their MIP. For the borrowers with a 30-year term, their MIP automatically ends when they hit 78 percent LTV as long as they have paid 60 months of MIP. For most borrowers 78 percent LTV occurs after 11 years because the FHA uses the last known value of the home, which is usually when you bought the home. The borrowers that have a 15-year term can have their MIP cancelled at 78 percent LTV as well, but they are not required to have made 60 MIP payments.
Refinancing out of FHA Loans
If you obtained your loan after June 3, 2013, you have MIP for the life of your loan. This means it never gets cancelled, no matter your LTV. The best way out of this situation is to refinance into a conventional loan once you hit 80 percent LTV. At that point, as long as your credit is good, you should not have trouble getting a conventional loan, which means you save a significant amount of money every month.
Overall, FHA MIP rates are not bad because they enable you to get into a home you might not have been able to purchase. Knowing your options when it comes to cancelling the MIP is important, especially if you are in the group that obtained your loan after June 3, 2013 and will have to pay the insurance premiums for the rest of your life if you never refinance.