FHA loans offer several advantages: a relaxed credit score requirement, low minimum down payment, reasonable closing costs, and often competitive interest rates. However, they come with a drawback: mortgage insurance premiums (MIP). Here’s an overview of how FHA MIP operates and its associated costs.

FHA mortgage insurance premiums (MIP) are additional fees that FHA loan borrowers are required to pay, both upfront and throughout the mortgage term, typically 30 or 15 years.

However, FHA MIP does not protect the borrower; rather, it safeguards the lender against borrower default. It funds reimbursements to lenders in case borrowers fail to meet their mortgage obligations.

FHA loans are insured by the Federal Housing Administration (FHA), ensuring that if a borrower defaults, the agency compensates the lender for the outstanding balance. FHA mortgage insurance premiums contribute to the Mutual Mortgage Insurance Fund (MMIF), which the FHA uses to reimburse lenders for losses.

Since FHA loan applicants may be perceived as higher risk due to lower credit scores, smaller down payments, or both, MIP helps lenders manage the risks associated with providing mortgages to these applicants. This system supports the FHA program, expanding homeownership opportunities to borrowers who might not qualify for conventional mortgages.

FHA loans are not the sole type of home loan that mandates borrowers to pay mortgage insurance. If you make a down payment of less than 20% with a conventional loan not backed by the government, you will need to pay private mortgage insurance (PMI).

The significant difference between PMI and MIP lies in duration: Unlike MIP, you won’t have PMI for the entire loan term. Instead, you can typically remove PMI once you have paid down your loan balance to 80% of your home’s purchase price or its appraised value at the time of purchase. With early mortgage repayments, you may even be able to eliminate PMI sooner.

0.55%

The annual MIP rate that most new FHA loan borrowers pay on the total mortgage amount.

FHA borrowers are responsible for two types of mortgage insurance premiums: an upfront premium and annual premiums.

  • FHA upfront mortgage insurance premium: 1.75% of the loan amount
  • FHA annual MIP: Varies depending on the loan size, term, and loan-to-value (LTV) ratio

Regardless of the loan amount you secure with an FHA loan, the upfront mortgage insurance premium remains fixed at 1.75 percent of that sum. You have the option to pay this premium in full at the closing or include it in your mortgage and pay it gradually over time. Opting to finance this premium adds interest costs, increasing your overall expenses.

FHA annual premiums are determined by factors such as the loan amount, loan term, and loan-to-value (LTV) ratio, which reflects the size of your down payment. This premium is paid in monthly installments along with your mortgage payment each year. Here’s an overview of how these premiums operate:

FHA loans with terms longer than 15 years

Loan amountLTV ratioMIP in basis pointsDuration of insurance payments
$726,200 or less90% or less50 (0.50%)11 years
90%-95%50 (0.50%)Entire loan term
More than 95%55 (0.55%)Entire loan term
More than $726,20090% or less70 (0.70%)11 years
90%-95%70 (0.70%)Entire loan term
More than 95%75 (0.75%)Entire loan term

FHA loans with 15-year terms or shorter

Loan amountLTVratioMIP in basis pointsDuration of insurance payments
$726,200 or less90% or less15 (0.15%)11 years
More than 90%40 (0.40%)Entire loan term
More than $726,20078% or less15 (0.15%)11 years
78%-90%40 (0.40%)11 years
More than 90%65 (0.65%)Entire loan term

FHA simple or streamline refinances

Loan amountLTV ratioMIP in basis pointsDuration of insurance payments
Any90% or less55 (0.55%)11 years
AnyMore than 90%55 (0.55%)Entire loan term

Let’s say you purchased a $340,000 home with a minimum 3.5 percent down payment of $11,900 on a 30-year FHA loan at 6.4 percent interest. For the $328,100 mortgage amount, you would pay an upfront premium of 1.75 percent, totaling $5,742. Additionally, because you secured a 30-year loan with a down payment of less than 10 percent, you’ll also pay annual premiums at a rate of 0.55 percent, amounting to $150 per month throughout the loan term.

For a 30-year FHA loan with a 3.5 percent down payment, you’ll need to pay MIP throughout the entire loan term. If you put down at least 10 percent, MIP payments are required for 11 years.

It’s important to note that these guidelines apply specifically to new FHA loans. The FHA has revised its rules on this matter multiple times in the past.

Loan origination dateDuration of insurance payments
July 1991-Dec. 2000Entire loan term
Jan. 2001-June 3, 20135 years; canceled at 78% LTV
After June 3, 2013Duration of insurance payments if 10% or higher down paymentDuration of insurance payments if less than 10% down
11 yearsEntire loan term

Regrettably, it’s not feasible to reduce your MIP amount over the duration of your loan. If you have an FHA loan, you will continue to make the same monthly MIP payments throughout the loan term or until they are no longer required, if your loan meets the eligibility criteria.

However, refinancing may offer an opportunity to lower your mortgage insurance payment in certain situations. The MIP rates have decreased over time, most recently in March 2023. This means that if you obtained your FHA loan before this date, refinancing could potentially secure a lower mortgage insurance rate. It’s important to consider that refinancing will also adjust your interest rate, so the decision should weigh the overall financial benefits, not just the reduction in MIP.

While all FHA loans mandate mortgage insurance for either the loan’s entirety or a specific number of years, you can potentially avoid or reduce FHA mortgage insurance by:

  • Seeking down payment assistance: You may qualify for various assistance programs that can increase your down payment to 10 percent, thereby eliminating the need to pay MIP for the entire loan term.
  • Exploring alternative mortgage options: Eligible service members can consider VA loans, while those purchasing in qualifying rural areas might opt for USDA loans. Both options often require no money down and do not entail mortgage insurance requirements.
  • Considering future refinancing: If you are unable to avoid FHA mortgage insurance at present, you might have the opportunity to refinance into a conventional loan without PMI later on.