December 8, 2022

FHA Mortgage Insurance Very Costly For Borrowers

FHA mortgage insurance is charged to borrowers to cover the cost of losses on defaulted mortgages.  The annual premium paid by a  borrower on an FHA loan has become very costly, amounting to thousands of dollars a year for many borrowers.

Effective April 18, 2011, the the annual FHA mortgage premium was increased as the FHA sought to shore up reserves for future potential losses on defaulted mortgages.  The FHA has a two tier mortgage insurance premium (MIP) schedule with different rates for different loan terms.  The FHA mortgage insurance premium is lower for loans equal to or less than 15 years compared to loans with terms of greater than 15 years.

The new rates established by the FHA for the annual mortgage insurance premiums are detailed below.

FHA ANNUAL MORTGAGE INSURANCE PREMIUM (MIP)
LOANS GREATER THAN 15 YEARS
LOAN TO VALUE MIP On or After April 18, 2011
95% OR LESS 110 BASIS POINTS
GREATER THAN 95% 115 BASIS POINTS
LOANS OF 15 YEARS OR LESS
LOAN TO VALUE MIP On or After April 18, 2011
90% OR LESS 25 BASIS POINTS
GREATER THAN 90% 50 BASIS POINTS

A basis point is one hundredth of a percent.  Therefore, the annual MIP on an FHA loan with a loan to value greater than 95% would be 1.15% of the loan amount.  On a $300,000 FHA loan, the annual premium would amount to $3,450 or a monthly fee of $287.50.

The monthly cost of FHA mortgage insurance on a 30 year loan continues until the loan to value declines to 78%.   In addition, the borrower must make at least 5 years of insurance premium payments before the MIP can be cancelled.

Over 5 years on the loan example cited above, a borrower would wind up paying $17,250 in insurance premiums and over ten years would be out of pocket by $34,500.

In addition to the monthly mortgage insurance premium that the borrower must pay, the FHA also charges a one time upfront mortgage insurance premium.  The current upfront MIP is 1.0% which can be financed into the loan.  In the case of a $300,000 loan, the borrower would be charged an upfront MIP of $3,000.  On a 30 year mortgage with a 4.5% rate, the cost of financing the extra $3,000 upfront MIP into the mortgage will cost the borrower a total of $5,472 over the life of the loan.

FHA mortgage insurance has become a very costly item for an FHA borrower.  For a borrower able to make a down payment of at least 5% or more, a conforming mortgage with private mortgage insurance can sometimes be a more cost effective financing method for qualified borrowers.  Potential borrowers able to make a 5% down payment should consult with their lender to see which option is more cost effective.