Key takeaways
- If you take out an FHA loan, you’re required to pay FHA mortgage insurance premiums (MIP).
- FHA MIP includes an upfront premium, typically paid at closing, and annual premiums.
- The cost of the annual premiums depends on the amount of your loan, the size of your down payment and loan term.
FHA loans come with a lenient credit score requirement, low minimum down payment, reasonable closing costs and often competitive interest rates. However, they do have a drawback: mortgage insurance premiums (MIP). Here’s how FHA MIP works and what it costs.
What is an FHA mortgage insurance premium (MIP)?
FHA mortgage insurance premiums (MIP) are additional fees FHA loan borrowers pay to protect lenders against default, or when a borrower fails to repay the loan. These premiums are required of borrowers who make a down payment of less than 20 percent. Most FHA borrowers need to pay the premiums for the duration of the 30- or 15-year loan term.
FHA MIP doesn’t protect the borrower, however. Instead, it helps lenders mitigate the risk of providing mortgages to lower-credit score borrowers making smaller down payments, while giving more borrowers who wouldn’t otherwise qualify access to home loans.
You might have heard that FHA loans are “insured” by the Federal Housing Administration (FHA). The reason: FHA mortgage insurance premiums go to the Mutual Mortgage Insurance Fund (MMIF), which the FHA uses to pay out claims to lenders looking to recoup losses when a borrower doesn’t repay.
Difference between FHA MIP vs. PMI
FHA loans aren’t the only type of home loan that require the borrower to pay mortgage insurance. If you’re obtaining a conventional loan and putting down less than 20 percent, you’ll pay for private mortgage insurance (PMI). The key difference between PMI and MIP: You won’t have to pay PMI for the entire loan term — just until you pay down your loan balance to 80 percent of your home’s value when you bought it. You might get to that point sooner if you prepay your mortgage — here’s more on that.
Learn more: FHA vs. conventional loans
How much does FHA mortgage insurance cost?
0.55%
The amount most new FHA loan borrowers will pay in annual MIP
Source: Federal Housing Administration
As the borrower, you’ll pay two FHA mortgage insurance premiums: an upfront premium and annual premiums.
- FHA upfront mortgage insurance premium: 1.75 percent of the loan amount
- FHA annual MIP: Varies based on the size, term and loan-to-value (LTV) ratio of the loan
Upfront mortgage insurance premium
No matter how much you borrow with an FHA loan, the upfront mortgage insurance premium totals 1.75 percent of that amount. You can pay this premium all at once at closing or add it to your mortgage and pay it over time. If you choose the latter, you’ll pay interest on this cost, adding to your overall expense.
Annual mortgage insurance premium
FHA annual premiums are based on the loan amount, loan term and loan-to-value (LTV) ratio, or size of your down payment. Each year, you’ll pay this premium in installments with your monthly mortgage payment. Here’s how the premiums work:
| Loan amount | LTV ratio | MIP in basis points | Duration of insurance payments |
|---|---|---|---|
| $726,200 or less | 90% or less | 50 (0.50%) | 11 years |
| 90%-95% | 50 (0.50%) | Entire loan term | |
| More than 95% | 55 (0.55%) | Entire loan term | |
| More than $726,200 | 90% or less | 70 (0.70%) | 11 years |
| 90%-95% | 70 (0.70%) | Entire loan term | |
| More than 95% | 75 (0.75%) | Entire loan term |
| Loan amount | LTVratio | MIP in basis points | Duration of insurance payments |
|---|---|---|---|
| $726,200 or less | 90% or less | 15 (0.15%) | 11 years |
| More than 90% | 40 (0.40%) | Entire loan term | |
| More than $726,200 | 78% or less | 15 (0.15%) | 11 years |
| 78%-90% | 40 (0.40%) | 11 years | |
| More than 90% | 65 (0.65%) | Entire loan term |
| Loan amount | LTV ratio | MIP in basis points | Duration of insurance payments |
|---|---|---|---|
| Note: These premiums apply to FHA refinances closed on or before May 31, 2009. The MIP refinance terms for subsequent mortgages are the same as those on regular FHA loans. | |||
| Any | 90% or less | 55 (0.55%) | 11 years |
| Any | More than 90% | 55 (0.55%) | Entire loan term |
Example of an FHA MIP payment
Say you bought a $340,000 home with the minimum 3.5 percent down ($11,900) on a 30-year FHA loan at 6.4 percent interest. For the $328,100 mortgage, you’ll pay the 1.75 percent upfront premium of $5,742. Since you took out a 30-year loan with 3.5 percent down for less than $726,200, you’ll also pay annual premiums at the 0.55% rate, or $150 a month, for the entire loan term.
How long will you pay FHA MIP?
If you get a 30-year FHA loan and put 3.5 percent down, you’ll be paying MIP for the entire term (or for as long as you have the loan). If you put down at least 10 percent, you’ll pay for 11 years.
This guidance applies to new FHA loans, however. The FHA has changed its rules more than once on this issue:
| Loan origination date | Duration of insurance payments |
|---|---|
| July 1991-Dec. 2000 | Entire loan term |
| Jan. 2001-June 3, 2013 | 5 years; canceled at 78% LTV |
| After June 3, 2013 | Duration of insurance payments if 10% or higher down payment | Duration of insurance payments if less than 10% down |
|---|---|---|
| 2014 | 11 years (until 2025) | Entire loan term |
| 2015 | 11 years (until 2026) | Entire loan term |
| 2016 | 11 years (until 2027) | Entire loan term |
| 2017 | 11 years (until 2028) | Entire loan term |
| 2018 | 11 years (until 2029) | Entire loan term |
| 2019 | 11 years (until 2030) | Entire loan term |
| 2020 | 11 years (until 2031) | Entire loan term |
| 2021 | 11 years (until 2032) | Entire loan term |
| 2022 | 11 years (until 2033) | Entire loan term |
| 2023 | 11 years (until 2034) | Entire loan term |
| 2024 | 11 years (until 2035) | Entire loan term |
Can you avoid FHA mortgage insurance?
All FHA loans with a down payment of less than 20 percent require mortgage insurance, either for the life of the loan or a set number of years. Still, you can avoid FHA mortgage insurance by:
- Putting down 20 percent – This is the simplest way to avoid FHA mortgage insurance — but if you have the savings to put down 20 percent, it might make more sense to work on your credit score to qualify for a conventional loan instead.
- Finding down payment assistance – You might qualify for one or more assistance programs to pair with an FHA loan. Keep in mind, though: This help likely won’t get you the full 20 percent, but it could help boost you to 10 percent so you’re not paying MIP for the entire loan term.
- Obtaining another type of mortgage – If you’re an eligible service member or buying in a qualifying rural area, you could get a VA loan or USDA loan, respectively, for no money down and with no mortgage insurance requirement.
- Refinancing in the future: If you can’t avoid FHA mortgage insurance now, you might be able to refinance into a conventional loan without PMI later on.
