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fha mortgage

There are two kinds of Federal Housing Administration (FHA) mortgage insurance. You must buy both when getting an FHA loan. The first takes a one-time payment and costs 1.75% of the loan amount. The second you pay annually. It costs between 0.45% to 1.05% of the loan amount, depending on your down payment, the amount of your loan and its term length. With a mortgage insured by the FHA, a lender can recover its losses if the loan defaults. This is why FHA loans are generally easier to secure than conventional mortgages. A financial advisor can help you find FHA loans or other options with rates that work for you.

How Much Is FHA Mortgage Insurance?

If you’re considering an FHA loan, there are two types of FHA mortgage insurance premiums you should be aware of. The first is a one-time, upfront payment you make at the closing. It equals 1.75% of the loan amount. If you don’t have the cash, you are allowed to roll over the amount into your loan. However, this will increase your monthly mortgage payments and the total interest you pay for the life of the loan.

Additionally, you must pay an annual mortgage insurance premium (MIP). A number of factors determine the rate, including the loan-to-value (LTV) ratio. The premium is divided into 12 monthly installments that are part of your monthly mortgage payment. To get a better sense of how your mortgage or FHA loan breaks down by month, use our mortgage calculator.

Here is what your annual MIP would be based on loan terms, loan amounts and LTVs. Note that all FHA loans are fixed rate.

For 30-year loans of $625,500 or less

  • If LTV is 95% or lower: MIP is 0.80% for the life of the loan*
  • If LTV is greater than 95%: MIP is 0.85% for the life of the loan

*If LTV is 90% or lower, MIP is for only the first 11 years

For 30-year loans greater than $625,500

  • If LTV is 95% or lower: MIP is 1.00% for the life of the loan*
  • If LTV is greater than 95%: MIP is 1.05% for the first 11 years

*If LTV is 90% or lower, MIP is for only the first 11 years

 For 15-year loans $625,500 or less

  • If LTV is 90% or lower: MIP is 0.45% for the first 11 years
  • If LTV is greater than 90%: MIP is 0.70% for the life of the loan

For 15-year loans greater than $625,500

  • If LTV is 78% or lower: MIP is 0.45% for the first 11 years
  • If LTV is 78.01% to 90%: MIP is 0.70% for the first 11 years
  • If LTV is greater than 90%: MIP is 0.95% for the life of the loan

Understanding FHA Loans 

FHA loans are among the easiest mortgage loans for which to qualify. They give individuals with only fair credit scores and small down payments the ability to borrow money and buy their dream house. In fact, you can secure an FHA loan with a credit score as low as 580. The minimum down payment is 3.5%.

Another advantage of FHA loans: they are assumable. This means that if you sell your home, say, to a relative, you can transfer the mortgage so that they assume the outstanding debt (and don’t have to apply for a new mortgage).

Of course, there is a trade-off: FHA mortgage insurance. Not only is it required, it’s often required for the term of the loan. But unless your down payment is 20% or more, you’ll have to get insurance with a conventional mortgage, too. And if you have a low credit score, private mortgage insurance (PMI) will likely cost more.

Can You Cancel FHA MIP?

FHA mortgage insurance

Unfortunately, the FHA has changed its rules so that new borrowers cannot cancel their FHA mortgage insurance. Only borrowers with FHA loans (or applications) dated before June 3, 2013 can cancel.

If you’ve had your FHA mortgage that long, cancelling may still not be possible. You’ll have to meet some requirements. The primary hurdle is that your LTV must be 78% or lower at the time of your request. Generally, it takes about 10 years for borrowers to bring their LTV down to that level.

Refinancing Is an Option 

But you can refinance your debt to get out of paying FHA MIP. This means taking out a conventional loan to pay off your FHA loan. Usually, you’ll have to wait for your finances to improve to do this.

You’ll also want to make sure you get a better interest rate on the conventional loan. After all, the idea is to lower your monthly payment. Biding your time will likely work in your favor. You’ll have more equity in the home and hopefully its value will go up.

When PMI May Be Your Best Bet 

For all the advantages of an FHA loan, it may not be your best route to home ownership. This is especially the case if you have good credit. If you have a small down payment and need to get mortgage insurance, the Urban Institute reports that monthly PMI payments may be less for borrowers with credit scores between 720 and 739. The rate can dip even lower for those with credit scores higher than 740.

 The Takeaway

FHA mortgage insurance

FHA loans can be a godsend if you don’t qualify for a conventional mortgage. Still, the mortgage insurance requirements can certainly be a deterrent. That’s especially true if you’ll have to pay the premium for the life of the loan. The insurance exists for the lender, not the borrower. But you have to pay for it. So weigh all your options, including possibly improving your credit score, before signing on the dotted line.

Tips for Buying a Home

  • Ensure that your credit score is in a good place. When you have a high, stable credit score, you can become eligible for lower mortgage rates, which translates to lower monthly payments.
  • Shop around for FHA loans from different lenders. The FHA doesn’t actually issue these directly. They work with mortgage lenders and back the mortgages. That’s why lenders ease their requirements for FHA loans, because the government would cover any defaults.
  • Reach out to a financial advisor to figure out how homeownership will impact your finances in the long-term. You’ll want to be sure that you can balance all of your money goals down the line. Our financial advisor matching tool can facilitate this conversation. It will help you find a financial advisor who meets your needs in your area and on your budget. You’ll be asked a few short of questions about your finances, and then the program will narrow down your options to three local advisors.

Photo credit: ©iStock.com/courtneyk, ©iStock.com/conejota, ©iStock.com/MangoStar_Studio

Jane Thier Jane Thier writes on a variety of personal finance topics for SmartAsset. Her expertise includes banking and mortgage. Jane is currently studying at Washington University in St. Louis and serves as editor-in-chief of Armour Magazine. Jane aims to receive her Master's Degree in Journalism.
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