When buying a home or refinancing an existing mortgage, if you don’t have a large enough down payment, you may have to purchase mortgage insurance. Some loans, such as an FHA loan, require that you also pay an upfront mortgage insurance premium before your mortgage closes. Find out more about what this premium is and when you have to pay it below. To understand how it could impact your personal finances you may find it beneficial to speak with a financial advisor.
What Is Upfront Mortgage Insurance Premium?
The premium for upfront mortgage insurance (UMFI) is collected when a Federal Housing Administration (FHA) loan is made. Lenders charge this fee and forward it to the FHA within 10 days of loan closing and disbursing funds. The UFMI premium is a one-time fee collected to help the FHA insure loans for low-to-moderate-income borrowers.
This is similar to private mortgage insurance (PMI), but it has its differences. PMI is collected by conventional private mortgage lenders each month if a buyer doesn’t put at least 20% down on the property. UMFI premiums protect lenders in the event of a default and the money is used by the FHA to insure loans for other borrowers.
How Much Is the UMFI Premium?
The rate of UFMI premiums is 1.75% of the loan amount. For a $200,000 mortgage, the fee is $3,500. All FHA borrowers pay the same UFMI premium rate, no matter how small or large their mortgage is. For borrowers who qualify for an FHA Streamline refinance, the UFMI premium drops to 0.55%. On the same $200,000 mortgage, the FHA Streamline refinance UFMI premium is only $1,100.
How Do You Pay the UMFI Premium?
There are two options to pay your UFMI premiums – paid in cash as part of your closing costs or added to the amount borrowed. The premium can be paid either at the time the loan closes or it can be rolled into the mortgage payments. Borrowers refinancing from one FHA loan to another within three years may receive credit for their original UFMI premium towards the new loan.
Including the premium into your monthly payments might take the pressure off of your finances today, but this approach can cause your monthly mortgage payment to increase. If a borrower is already stretched thin this might be a dealbreaker. Additionally, you will pay interest on the UFMI premiums over the life of your mortgage, which means you’ll end up paying even more than you would have for the premium over the long haul.
UFMI Premium vs. Ongoing Mortgage Insurance Premium
The UFMI premium is a one-time fee charged by the lender on behalf of the FHA. In addition to this one-time fee, FHA borrowers also must pay an ongoing mortgage insurance premium for the life of their loan.
The ongoing mortgage insurance premium is included in your monthly mortgage payment. The amount charged ranges from 0.45% to 1.05% of your mortgage balance. Rates vary based on the length of your original loan, your amount borrowed and the loan-to-value (LTV). In general, the shorter the mortgage and the lower the LTV, the lower your mortgage insurance premiums are.
Previously, once you had enough equity, you could request the FHA to remove the mortgage insurance premium from your loan. However, mortgage insurance premiums are due for the life of the loan for all FHA loans issued after June 2013.
Why Lenders Charge UFMI
To promote lending to low-to-moderate-income borrowers, the FHA insures lenders against losses. Lenders charge the UFMI premium and ongoing mortgage insurance premiums to fund the FHA’s protection.
Borrowers can get an FHA loan with as little as 3.5% down and a credit score as low as 580, which makes them a risky mortgage if home values drop significantly. During the housing crisis of 2008 to 2011, many homeowners defaulted on mortgages where the home was worth less than the mortgage balance.
To shore up the fund covering these loans, the FHA instituted the UFMI premium fee of 1.75% starting with all loans assigned a case number after January 26, 2015.
Tips to Avoid Paying for UFMI
There are several strategies borrowers can use to avoid paying the UFMI premium when buying or refinancing their home. You may want to do this if an FHA loan is attractive to you but you have more than enough money to put down for the loan. Here are the most popular tips you can use to avoid the premium:
- Apply for a conventional mortgage: Conventional mortgages do not charge a UFMI premium. Some conventional lenders allow borrowers to buy a home with just 3% down if their income and credit score qualify.
- Put 20% down: Conventional loans of 80% LTV or less do not pay monthly mortgage insurance premiums.
- Get a second mortgage: For borrowers without a 20% down payment, some lenders allow “piggyback mortgages” to eliminate mortgage insurance premiums. In this example scenario, a down payment of 3%, the first mortgage is 80% and a second mortgage is 17%.
- Seller financing: A home seller may finance some or all of the purchase price to avoid paying a UFMI premium or ongoing mortgage insurance premiums.
- Other government programs: Loans through the USDA or VA do not charge a UFMI premium. However, these programs may have their own upfront or ongoing fees, so discuss your options with a banker or mortgage broker before proceeding.
The Bottom Line
If you’re planning on getting an FHA loan, you may have to pay an UFMI premium of 1.75% of the amount borrowed. While this is an added expense, FHA loans enable borrowers to get approved when other programs are unavailable based on their income or credit score. There are ways around paying a UFMI premium by using other loan programs. The best strategy is to work with your banker or mortgage broker to explore all of your options.
Tips for Getting a Mortgage
- Buying a house with a mortgage is a large financial decision that you could be committing to for several decades to come. It may be wise to first speak with a financial advisor before you move forward to make sure you’ve thought of how it will impact your full financial picture. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Before applying for a mortgage, use our mortgage calculator to determine how much you’ll pay each month. This calculator provides an estimate based on the amount borrowed, interest rate and term. You can also add in property taxes, insurance, HOA dues and other expenses that might apply.
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