FHA Mortgage Insurance: What It Is and How Much It Costs
If you’re approved for an FHA loan — which is a mortgage insured by the Federal Housing Administration (FHA) — you’re required to pay for FHA mortgage insurance. The insurance protects FHA-approved lenders against losses if you default on your mortgage payments.
FHA mortgage insurance is more expensive than private mortgage insurance (PMI) on a conventional loan, and is required regardless of your down payment amount. Understanding how much it costs and how it works will help you decide if an FHA mortgage is the best home loan option.
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What is FHA mortgage insurance?
FHA mortgage insurance is a government guarantee to pay a lender’s losses if a homeowner defaults on an FHA loan. The FHA collects two types of premiums from borrowers through their lenders, and the insurance income is used to operate the FHA’s mortgage insurance programs.
The insurance only covers FHA-approved lenders and FHA mortgages on single-family homes, multifamily properties, manufactured homes, condos and co-ops. Two types of FHA mortgage insurance are payable on an FHA loan: an upfront mortgage insurance premium (UFMIP), and an annual mortgage insurance premium (MIP).
How much does FHA mortgage insurance cost?
The cost of the UFMIP for most purchase and refinance loans is 175 basis points, which is 1.75% of your loan amount. UFMIP is typically financed into your loan amount over the term of the loan, but can be paid entirely in cash.
The cost of annual MIP ranges between 15 and 75 basis points, which is 0.15% to 0.75% of your loan amount. The MIP is charged annually, divided by 12 and added to your monthly payment.
The cost of FHA mortgage insurance varies based on:
- Your loan-to-value (LTV) ratio. Lenders divide your loan amount by the value or price of your home to determine your LTV ratio. The more you borrow, the higher the LTV ratio.
- The loan term. Your loan term is the length of time you choose to pay off the loan, and is typically 15 or 30 years for FHA loans.
- The loan amount. Each year, new FHA loan limits are set based on the direction of home prices in the prior year. The maximum for a single-family home in most parts of the country in 2023 is $472,030. Borrowers in higher-cost parts of the country may be eligible for higher loan amounts, up to a maximum of $1,089,300.
- The loan purpose. Current FHA borrowers may be eligible for lower MIP premiums if they qualify for an FHA streamline refinance. Otherwise, MIP premiums for purchases and most refinance types are the same.
Good news in 2023: Annual MIP costs are lower in 2023, thanks to a reduction announced by the U.S. Department of Housing and Urban Development (HUD). The changes took effect March 20 and amount to average savings of $800 annually for qualified FHA borrowers. The table below shows the new FHA MIP rates based on the factors outlined above.FHA MIP for mortgage term of more than 15 years*
| Base loan amount | LTV ratio | MIP charged (percentage of loan amount) | How long you’ll pay it |
|---|---|---|---|
| $726,200 or lower | Up to 90% 90% to 95% Above 95% | 0.50% 0.50% 0.55% | 11 years Life of loan Life of loan |
| More than $726,200 | Up to 90% 90% to 95% Above 95% | 0.70% 0.70% 0.75% | 11 years Life of loan Life of loan |
*Applies to all purchases and refinances except FHA streamlines, FHA refinance loans closed on or before May 31, 2009 and Hawaiian Home Lands loans.
FHA MIP for mortgage term of 15 years or less*
| Base loan amount | LTV ratio | MIP charged (percentage of loan amount) | How long you’ll pay it |
|---|---|---|---|
| $726,200 or lower | Up to 90% Above 90% | 0.15% 0.40% | 11 years Life of loan |
| More than $726,200 | Up to 78% 78% to 90% Above 90% | 0.15% 0.40% 0.75% | 11 years 11 years Life of loan |
*Applies to all purchases and refinances except FHA streamlines, FHA refinance loans closed on or before May 31, 2009 and Hawaiian Home Lands loans.
FHA MIP for FHA streamline refinances
| Base loan amount | LTV ratio | MIP charged (percentage of loan amount) | How long you’ll pay it |
|---|---|---|---|
| All | Up to 90% Above 90% | 0.55% 0.55% | 11 years Life of loan |
How does FHA mortgage insurance work?
FHA-approved lenders are required to disclose the cost of FHA mortgage insurance when they provide a loan estimate. Both the upfront and annual mortgage insurance premiums must be collected to insure an FHA mortgage, but you’ll pay each type differently.
The upfront mortgage insurance premium (UFMIP) works as follows:
- It’s charged in a lump sum equal to 1.75% of your loan amount
- It’s typically financed (added) to your mortgage amount
- It can be paid in cash, as the long as the amount is paid in full (partial cash payments aren’t allowed)
- It isn’t refundable unless you replace your current FHA loan with a new FHA loan
- It’s required regardless of your down payment amount or credit score
The annual (or periodic) mortgage insurance premium (MIP) works as follows:
- The premium amount is charged annually based on the following factors:
- The LTV ratio
- Your base loan amount
- The mortgage term
- The premium is divided by 12 and charged in monthly installments that are added to your monthly mortgage payment
- The premium is required regardless of your down payment or home equity amount
- The monthly premium is the same regardless of your credit score
FHA math in action: Calculating FHA mortgage insurance
You won’t need to know the formula for calculating FHA mortgage insurance on your loan — your lender has mortgage software that will crunch the numbers for you. That said, it doesn’t hurt to have a basic understanding of how it works. The examples below assume you’re borrowing $300,000 after making a minimum 3.5% down payment on a 30-year fixed rate FHA mortgage.
How to calculate FHA mortgage insurance
| How to calculate your UFMIP | The math |
| Multiply your loan amount by 1.75% (0.0175) The result is your UFMIP | $300,000 x 0.0175 = $5,250 |
| How to calculate your MIP | The math |
| Multiply the amount you’re borrowing by 0.55% (0.0055) | $300,000 x 0.0055 = $1,650 |
| Divide this figure by 12 The result is your monthly MIP | $1,650/12 = $137.50 |
FHA MIP vs. PMI: What’s the difference?
Most first-time homebuyers choose an FHA loan or conventional loan to take advantage of low down payment options. Conventional private mortgage insurance (PMI) is required on a conventional mortgage with a down payment of less than 20%. There are some major differences between FHA MIP and PMI you need to know to decide which loan is right for your home purchase.
| FHA MIP | CONVENTIONAL PMI |
|---|---|
| Not impacted by credit scores | Impacted by credit scores |
| Required regardless of down payment amount | Not required with a 20% down payment or higher |
| Allows for scores as low as 500 | Requires a minimum 620 credit score |
| Must be paid for the life of your loan if you make the minimum 3.5% down payment | Can be canceled once 20% equity is verified, regardless of your down payment amount |
How to remove FHA mortgage insurance
The most common way to remove monthly FHA mortgage insurance is to refinance your FHA loan to a conventional loan. However, if you make at least a 10% down payment when you buy your home with an FHA loan, the annual MIP will drop off automatically after 11 years.