Home loans backed by the Federal Housing Administration (FHA) can be an appealing option for borrowers — especially those who are looking for a lower down payment or more lenient credit score requirements. But there’s a trade-off to keep in mind as you eye those benefits: Borrowers with FHA loans are required to pay a mortgage insurance premium (MIP) for the length of their loan, or at least for 11 years.
These premiums pay for insurance that protects FHA-backed lenders in case of loan default, which makes it possible for them to offer FHA loans with more flexible underwriting standards. But MIPs can make both your upfront closing costs and your mortgage payments more expensive. And you can’t avoid them — so it’s important to include the cost in your calculations when you compare different types of mortgages. Read on for a look at how FHA MIPs work, some pros and cons of this type of mortgage insurance, and strategies to help manage the cost.
Key Points
• FHA loans offer lower down payments and credit score requirements.
• FHA MIPs protect lenders, making FHA loans possible.
• MIPs are required for the loan’s duration or for 11 years if a borrower makes a 10% down payment.
• MIPs add to upfront and monthly costs.
• MIPs are not currently tax-deductible.
Understanding FHA Mortgage Insurance Premiums
If you decide to purchase a home with an FHA loan, you can expect your lender to require that you pay for two types of protection: homeowner’s insurance and FHA loan mortgage insurance.
Most people are aware of the need to buy homeowner’s insurance, which covers your home and property against the cost of potential damage or theft. But borrowers — especially first-time homebuyers — aren’t always aware of what FHA home loan mortgage insurance premiums are for, or why they have to pay for them. Here’s a quick summary of how FHA MIPs work.
• FHA loans are mortgages that are provided by private lenders, but they’re insured by the FHA, a component of the U.S. Department of Housing and Urban Development (HUD). This means that if a borrower defaults on an FHA-backed loan, the FHA will reimburse the lender for the loan’s unpaid principal balance.
• The mortgage insurance premiums borrowers pay as part of their FHA loan costs go into a fund (the Mutual Mortgage Insurance Fund, or MMIF), which the FHA uses to pay back approved lenders that claim a loss.
• Because FHA lenders know they can recoup their money, they can work with applicants they might otherwise turn down.
In other words, MIPs make the FHA program possible. Which is a good thing, because it can give borrowers who might not qualify for a conventional loan an opportunity to buy a home. (This includes people with so-so-credit, a lower income, and/or little money saved for a down payment, for example.) The downside, of course, is that MIPs add to the cost of borrowing with an FHA home loan — and they’re required.
FHA loans differ from conventional loans in other ways. They have special FHA appraisals and FHA flipping rules for example. Read up on them thoroughly in an FHA loan buyers guide.
Types of FHA Mortgage Insurance Premiums
Borrowers with FHA home loans pay two types of mortgage insurance premiums.
Upfront Mortgage Insurance Premium (UFMIP)
The FHA’s upfront mortgage insurance premium is a one-time payment that’s based on the amount you finance. You can pay the full amount out of pocket at closing or, if you prefer, you can have this amount added to the balance of your FHA loan. If you choose the latter option, however, you’ll pay interest on this amount, which will add to the overall cost of your loan.
Annual Mortgage Insurance Premium (MIP)
You’ll also pay an annual mortgage insurance premium through the life of your loan (or at least for several years). This amount is typically divided by 12 and added to your monthly mortgage payment. Because the annual premium is charged as a percentage of your loan balance, the amount you are charged will decline each year as you pay off your loan balance.
How FHA MIP Differs from Private Mortgage Insurance (PMI)
Mortgage insurance isn’t limited to FHA loans. Although USDA and VA loans (backed by the United States Department of Agriculture and U.S. Department of Veterans Affairs) don’t require MIPs, they have different fee requirements. And borrowers who put down less than 20% on a conventional loan can expect to pay for something called private mortgage insurance (PMI) instead of MIP.
When you’re looking at PMI or MIP, the purpose is the same: to protect the lender in case the borrower defaults on the loan. But with PMI, the money goes to the private lender that finances your home purchase. And you won’t have to pay for PMI for the duration of your conventional loan: As soon as you have 20% equity in the home, or an 80% loan-to-value (LTV) ratio based on your original purchase price and loan amount, you can request a cancellation.
Calculating FHA Mortgage Insurance Premiums
Your lender will calculate your FHA MIP amounts, and let you know how and when to pay them. But here are some basics that can help you estimate what you’ll pay. (You can also use an FHA loan calculator table to better understand what your loan costs might be.)
Factors Influencing MIP Rates
MIP rates are set by the FHA, not individual lenders, and rates may go up or down every few years or so. The FHA regularly reevaluates MIP pricing based on the condition of the MMIF as well as current housing and economic conditions. Most recently, in 2023, the Department of Housing and Urban Development reduced annual mortgage insurance rates by 30 basis points, reducing rates for most homebuyers from 0.85% of the loan amount to .55%.
Current MIP Rates and Guidelines
The upfront mortgage insurance premium you’ll pay on any FHA loan—no matter how much you borrow—will be 1.75% of your loan amount.
The annual mortgage insurance premium for most FHA loans is currently 0.55% of the loan amount—but your specific rate may range from 0.15% to 0.75%, depending on the:
• Loan amount: Larger loan amounts, which can increase the lender’s risk, usually have higher MIPs.
• Loan term: Loans with shorter terms (15 years vs. 30) are typically less risky for lenders and usually have lower MIPs.
• Down payment or LTV Ratio: A bigger down payment or lower LTV ratio also can mean less risk for the lender, which can result in lower MIPs.
Recommended: FHA Mortgage Loan Calculator
Duration of FHA Mortgage Insurance Premium Payments
Most borrowers pay FHA MIPs for the entire length of their loan. But if you can manage a down payment of 10% or more, you may be able to limit MIPs to the first 11 years of your loan.
Borrowers with older FHA loans — loans taken out before June 3, 2013 — may be able to have their MIPs canceled once their equity reaches 22%, as long as they’ve made timely payments for at least five years. But that option doesn’t apply to more recent FHA loans.
Impact of FHA MIPs on Borrowers
An FHA loan may be the best, or only, way for some borrowers to get into the high-priced housing market. But when you’re comparing your options, it’s important to consider how FHA MIPs could affect your monthly mortgage payment and the overall cost of your loan.
Monthly Payment Implications
Here’s a very basic example of how an MIP could impact your monthly mortgage payment.
Let’s say you’re purchasing a $350,000 home with a 3.5% down payment ($12,250), bringing the total amount you need to borrow to $337,750. This makes your 1.75% upfront MIP $5,910.63.
$350,000 – $12,250 = $337,750 x 1.75% = $5,910 upfront
Your annual MIP (using the FHA’s average rate of .55%) would come out to $1,857.63, or approximately $154.80 per month
$350,000 – $12,250 = $337,750 x .55% = $1,857.63 annual MIP ÷ 12 = $154.80 per month
As noted above, the actual monthly MIP payment would change each year over the life of the loan as you make payments and the principal balance declines.
Overall Loan Cost Considerations
Remember, depending on the size of your down payment, you could be paying an annual MIP cost every month for the length of your loan, or at least 11 years.
Recommended: FHA Loans Guide
Strategies to Manage FHA MIP Costs
Unfortunately, you can’t lower the amount of your FHA MIPs during your loan term. But you may have options when it comes to avoiding or managing these costs.
Making a Larger Down Payment
If you can pull together a larger down payment (at least 10%), you can limit your annual FHA MIP to 11 years. By qualifying for a down payment assistance program — many of which are available to first-time homebuyers — you could give your down payment the necessary boost. FHA lenders also can allow borrowers to use a “no-strings-attached” gift from an approved third party, like a friend or family member, to help with down payment or closing costs.
Refinancing to a Conventional Loan
Once you reach 20% equity in your home, you may find it makes sense to refinance from your FHA loan to a conventional loan. This way you can stop paying the MIPs that are required for an FHA loan, and you won’t have to pay for PMI with the new loan. While you’re building up your equity, you can also work on building a stronger borrower profile so you can meet conventional loan requirements — which are typically stricter than FHA criteria — and get the best loan terms possible.
Exploring FHA Streamline Refinancing
The FHA Streamline Refinance program is a simplified version of a mortgage refinance for borrowers who already have a loan backed by the FHA. If you’re eligible for this type of refinance, and you got an FHA loan prior to 2023, you may benefit from being able to access today’s lower annual MIP rates. But you can’t avoid MIPs altogether. And you’ll have to pay a new upfront MIP when you get the new loan.
The Takeaway
The MIPs homebuyers are required to pay with an FHA-insured loan help make the program possible. But the cost of MIPs — and the fact that they typically last for the life of the loan — can be daunting for borrowers. Though you can’t negotiate with lenders to get a lower MIP (the FHA determines both upfront and annual MIP rates), you can compare the overall loan offers from various FHA-approved lenders. And you can keep your eye on your equity so you’ll know if it might be time to refinance.
SoFi offers a wide range of FHA loan options that are easier to qualify for and may have a lower interest rate than a conventional mortgage. You can down as little as 3.5%. Plus, the Biden-Harris Administration has reduced monthly mortgage insurance premiums for new homebuyers to help offset higher interest rates.
FAQ
How are FHA MIP rates determined?
The FHA reevaluates and adjusts MIP rates periodically based on the condition of its Mutual Mortgage Insurance Fund, as well as current housing and economic conditions.
Can FHA MIPs be canceled after reaching a certain equity level?
No. Unlike the private mortgage insurance on a conventional loan, which goes away after a homeowner reaches 20% equity, FHA MIPs cannot be canceled.
Are FHA MIP payments tax-deductible?
No. Although the Further Consolidated Appropriations Act of 2020 allowed qualified taxpayers to take a tax deduction for MIP and PMI costs for the tax years 2018 through 2021, the deduction has expired and is no longer available.
How do FHA MIPs affect my monthly mortgage payment?
The annual FHA MIP, which is divided into 12 equal amounts, adds to a borrower’s monthly payment amount for the life of the loan, or at least 11 years. If you choose to roll the upfront MIP into your loan, instead of paying it all at once at closing, that cost also can be added to the monthly payment (although you will then pay interest on the upfront MIP amount).
Are FHA MIPs required for the life of the loan?
The amount of your down payment determines how long you’ll have to pay FHA MIPs. If you can make a down payment of 10% or more when you take out your FHA loan, your annual MIP is only required for 11 years; otherwise it is there for the life of the loan.
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¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
†Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency.
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