FHA Mortgage Insurance (PMI) Explained

FHA mortgage insurance, commonly known as FHA PMI (Private Mortgage Insurance), plays a significant role in FHA loans. 

If you’re considering an FHA loan, it’s crucial to comprehend how FHA PMI works, its calculation, and the possibility of canceling it. 

This guide provides valuable insights into FHA PMI, empowering borrowers to make informed decisions when navigating the world of FHA loans. From understanding the calculation of FHA PMI to exploring options for cancelation, we’ll shed light on this important aspect of FHA financing.

What is FHA PMI – Mortgage Insurance Premium 

FHA loans, which are insured by the Federal Housing Administration, come with a unique form of mortgage insurance called Private Mortgage Insurance (PMI). Understanding what FHA PMI is and how it works is crucial for borrowers considering an FHA loan. Let’s dive into the details:

Definition of FHA PMI

• FHA PMI, also known as Mortgage Insurance Premium (MIP), is a fee that borrowers pay to protect lenders against potential losses in case of loan default.
• It is a requirement for all FHA loans and is designed to ensure the stability of the FHA program.

Calculation of FHA PMI

• The calculation of FHA PMI involves a percentage of the loan amount.
• Previously, the PMI rate for FHA loans was 0.85% of the loan amount.
• Recent changes have reduced the rate to 0.55% of the loan amount, resulting in lower monthly PMI payments.

FHA Mortgage Insurance Upfront Fee (UFMIP)

• In addition to the monthly PMI, FHA loans also require an upfront fee known as the Upfront Mortgage Insurance Premium (UFMIP).
• The UFMIP is a one-time payment made at closing and is usually financed into the loan amount.
• The current UFMIP rate is set at 1.75% of the loan amount.

How Long Is  FHA PMI On the Loan? 

• Unlike conventional loans, where PMI can be cancelled once a certain level of equity is reached, FHA PMI is typically required for the entire loan term.
• Unless the borrower puts down at least 10% on the home purchase, FHA PMI remains in effect for the life of the loan.

While FHA PMI may seem like an added expense, it allows borrowers with lower credit scores and smaller down payments to access homeownership.

For some borrowers, the benefits of an FHA loan, such as more flexible qualification requirements, outweigh the cost of FHA PMI.

How is FHA Mortgage Insurance Calculated?

Calculating FHA PMI involves a straightforward process based on the loan amount and the annual mortgage insurance premium (MIP) rate. Here’s how it works:

Loan Amount:

• The loan amount refers to the total amount borrowed from the lender to finance the home purchase.
• The MIP rate is applied to this loan amount to determine the annual FHA PMI.

MIP Rate:

• The MIP rate is set by the Federal Housing Administration and is subject to change periodically.
• Currently, the MIP rate for FHA loans is 0.55% of the loan amount per year.

Calculation Example:

Let’s consider a hypothetical scenario where the loan amount is $200,000.

To calculate the annual FHA PMI, multiply the loan amount by the MIP rate: $200,000 x 0.0055 = $1,100.

This means that the borrower would pay approximately $1,100 per year in FHA PMI.

Monthly FHA PMI:

To determine the monthly FHA PMI payment, divide the annual FHA PMI by 12: $1,100 / 12 = $91.67 (rounded to the nearest cent).

In this example, the borrower would need to budget around $91.67 per month for FHA PMI.

How to Cancel FHA Mortgage Insurance 

Unlike conventional loans, FHA PMI does not automatically cancel once a certain level of equity is reached. However, there are options for borrowers to eliminate or reduce FHA PMI:

1. Refinancing

Refinancing into a conventional loan is one way to remove FHA PMI. Once the loan-to-value ratio reaches 80% or lower, borrowers can refinance and eliminate the PMI requirement.

2. Loan Payoff

Another option is to pay down the mortgage balance to reach an 80% loan-to-value ratio. Once this threshold is achieved, FHA PMI can be canceled.

3. Loan Term 

For FHA loans with a loan-to-value ratio of 90% or less, the MIP can be removed after 11 years if the loan term is 15 years or longer. If the loan term is less than 15 years, the MIP can be canceled once the loan-to-value ratio reaches 78%.

4. Consultation with Lender 

It is important for borrowers to communicate with their lender regarding FHA PMI cancellation or reduction options.

Lenders can provide specific guidance based on individual circumstances and loan agreements.

In conclusion, FHA mortgage insurance, or FHA PMI, is an integral part of FHA loans that borrowers need to understand. 

By grasping the calculation of FHA PMI and the potential avenues for cancelation, homebuyers can make informed choices that align with their financial goals.

 Remember, FHA PMI may be a persistent factor throughout the life of the loan, but options like refinancing or loan payoff can help eliminate or reduce it. 

Consultation with a trusted mortgage professional is essential to explore personalized strategies and make the most of FHA financing opportunities.