FHA MIP (Mortgage Insurance Premium) rates continually change. Sometimes they go up and sometimes they go down. It depends on how the FHA-insured loan portfolios performed in the past and what they predict it will do in the future. 2015 saw a drop in rates and 2016 may even see a larger drop depending on what happens in the near future. It is not unprecedented to think they may drop again, making FHA loans even more attractive for many borrowers. In order to understand the reasoning behind MIP and why it is charged, let’s have a look at its history.
The FHA began in 1934 when banks needed help to deal with the large number of foreclosures they experienced. Contrary to popular belief, foreclosures are hard on the banks – almost as hard as it is for the people losing their home. Banks have to take possession of the house and resell it. The resale price is typically much lower than the amount owed on the house, forcing the bank to take a tremendous loss. This is bad for everyone involved which is why the FHA started its program. The loan programs they created were easy to qualify for, but they required borrowers to pay mortgage insurance premiums. The money collected for the premiums went into a reserve account which was held to help banks in the event that a borrower defaulted on his loan.
This program worked great for many years. Any time the reserves got low, however, the MIP rates would have to increase. Congress requires that the FHA has a continuing balance of 2 percent of the amount of the FHA loans outstanding. This was typically not a problem, except for when the housing crisis of 2008 occurred. Too many homeowners defaulted on their payments and the FHA’s reserves dwindled into the negatives. This required them to increase the payments more than 40 percent than they were previously, making FHA loans one of the most expensive options on the market. The increase in MIP rates helped the FHA recoup its reserves and hit the 2 percent threshold late last year. In January 2015, the FHA did lower the rates as much as 30 percent, but we may even see another decrease in the near future.
A Closer Look at the FHA MIP History
As you can see below, the MIP rates changed drastically throughout the years. The main determinant of the rates is the percentage of reserves the FHA has on hand which is directly related to the number of homeowners making their mortgage payments on time. From October 2008 to the present, here are the MIP rates:
- Upfront Mortgage Insurance Rates – Upfront MIP goes up and down quite a bit. In October 2008, it was 1.75 percent of the loan amount but then increased to 2.25 percent in April 2010. It decreased back down to 1 percent in October 2010 and remained there until April 2012 when it went back up to 1.75 percent where it remains today.
- Annual Mortgage Insurance Rates – Annual mortgage insurance did not change much during the housing crisis until October 2010 when it went up to 0.9 percent of the loan amount. It increased again in April 2011 to 1.15 percent and yet again in April 2012 to 1.25 percent. Its highest ranking, however, occurred in April 2013, when it hit 1.35 percent but then decreased in January 2015 to 0.85 percent where it is today.
What’s the Difference Between Upfront and Annual Mortgage Insurance?
Many people wonder the difference between upfront and annual mortgage insurance. The names speak for themselves, but understanding what they are and how you pay them can help you determine if the FHA loan is right for you.
FHA Upfront MIP
Upfront MIP is the fee you pay at the closing. You pay this fee every time you get a new FHA loan, including when you refinance into one. The escrow agent adds the fee to your closing costs, increasing the amount of money you must bring to the closing. If you do not have the money to bring because of its significant cost, you may be able to add it into your loan amount. The FHA does not require lenders to count the MIP against the loan-to-value ratio, which means you can still put down 3.5 percent on the home and roll upfront MIP into the balance. For a better understanding, take for example a loan amount of $300,000. The upfront MIP charge would be $5,250. If you are getting an FHA loan because of a lack of cash reserves, it might be difficult to come up with this money, which is why you are able to roll it into your loan amount.
FHA Annual MIP
Annual MIP is different – you do not pay it at the closing. Instead, you pay it on a monthly basis with your mortgage payment. This means that the mortgage insurance premium figures into your debt ratio and plays a role in your approval. Using the same loan amount as above, a $300,000 loan would require MIP payments of $212.50 per month at the 0.85 rate right now. That is a total of $2,550 per year divided equally among the 12 payments. You must make these payments on time with your principal and interest payments in order to stay in good standing on your loan.
Refunding your Upfront MIP
The good news about upfront MIP is that you can receive a refund if you refinance into another FHA loan. The refinance program is called the FHA Streamline program. Essentially, this program allows you to refinance into a lower rate in another FHA loan without too many qualification requirements. Most of the requirements come from your existing FHA loan, including the appraised value of your home, credit score, and income, unless the lender sees a reason to update the information. When you refinance, a portion of the original upfront MIP you paid gets refunded to you. This is not a cash refund; however, the money goes towards the new mortgage insurance premium on the new loan. The amount you receive depends on when the loan originated. If more than 3 years passed since you received the first loan, you will not get a refund. If you are within the 3 years and you made more than 6 payments on the loan, you can receive a refund starting at 70 percent of the amount you paid if you refinance right at the sixth month of having the original loan. From there, the refund decreases 2 percent every month until you reach 36 months, at which point the refund hits its lowest point of 10 percent.
The Exceptions to the Rule
There are a few exceptions to the MIP rule, however. If you have a loan higher than $625,000 or a 15-year loan as opposed to a 30-year loan, your rates will fall into the following categories:
- Higher than $625,000 loan amount with an LTV less than 95 percent pays a 1 percent annual mortgage insurance rate
- Higher than $625,000 loan amount with an LTV greater than 95 percent pays a 1.05 percent annual mortgage insurance rate
- 15-year terms with an LTV less than 90 percent and a standard loan amount pay 0.45 percent annual mortgage insurance
- 15-year terms with an LTV greater than 90 percent and a standard loan amount pay 0.70 percent annual mortgage insurance
- 15-year term with a loan amount higher than $625,000 and an LTV less than 78 percent pay .45 percent annual mortgage insurance
- 15-year term with a loan amount higher than $625,000 and an LTV between 78 percent and 90 percent pay 0.70 percent annual mortgage insurance
- 15-year term with a loan amount higher than $625,000 and an LTV greater than 90 percent pays 0.95 percent annual MIP
All borrowers must pay FHA MIP charges throughout the life of the loan unless they have an LTV less than 90 percent. If this is the case, you only pay the insurance for 11 years. The insurance gets canceled at that point. If you wish to remove the insurance yourself, the only way to do it is to have a full appraisal conducted on the house to see if your LTV is now lower than 78 percent.