What Is Mortgage Insurance Premium?

Mortgage insurance premiums (MIPs) are a type of insurance paid to the Federal Housing Administration (FHA) for certain mortgage loans.

If you can buy a home with a Federal Housing Administration (FHA) loan, you could benefit from a low down payment and more favorable interest rates. That's the good news. The bad news? You'll need to pay for mortgage insurance premiums (MIPs). 

With FHA loans, you must pay MIP regardless of your down payment or equity amount. Since FHA loans typically target lower-income borrowers, FHA mortgage insurance is designed to compensate lenders in case of defaults. MIP payments go directly to the FHA and can be used to compensate lenders when necessary.

What is Mortgage Insurance Premium?

Mortgage insurance premiums (MIPs) are a specialized type of mortgage insurance paid directly to the Federal Housing Administration (FHA). The FHA requires all borrowers to pay MIP regardless of their down payment or equity amount. MIP insurance compensates lenders in case of a loan default. However, unlike conventional or private mortgage insurance (PMI), MIP payments are made directly to the FHA

There are two types of MIP, with rates set directly by the FHA. Usually, you'll have to pay for both. They are:

Upfront Mortgage Premium  

If you're required to make an upfront mortgage premium payment, it usually equals 1.75% of the total loan amount. As the name implies, this one-time upfront payment is usually made at closing. 

Annual Mortgage Premium  

The annual mortgage premium is tied to the total loan amount but can vary by loan terms and based on your down payment. Annual mortgage premium fees range from  0.15% to 0.75% of the outstanding loan amount. Usually, this is divided into monthly payments and added to your mortgage bills.

For example, if you have a 0.5% annual mortgage premium and an outstanding mortgage of $300,000, your annual fee would be $1,500. Divided by 12 months, that's $125 a month. 

How Does Mortgage Insurance Premium Work?

FHA mortgage insurance premiums (MIP) are additional fees you'll need to pay to secure an FHA loan.  These fees are designed to protect lenders against borrowers defaulting on a loan.  

Mortgage insurance premiums are required of borrowers who make a down payment of less than 20%. Unlike private mortgage insurance, most FHA borrowers will pay the premiums for the duration of the loan term, even after crossing 20% equity in the home.

FHA MIP isn't designed to protect the borrower, despite being called insurance. Instead, it helps mitigate the risk of providing mortgages to borrowers with a lower credit score, smaller down payments, or both. Sometimes, these borrowers wouldn't qualify for a conventional mortgage without the FHA loan. In that case, the MIP is a way to support lenders and facilitate the housing markets by helping more families buy homes.  

For example, suppose you want to buy a home for $30,000. You have saved up $15,000 for the down payment and closing costs. You meet income requirements to qualify for an FHA mortgage. With the MIP, you'll need to pay around 1.75% in upfront mortgage premium, or $5,075 on a $290,000 loan. In addition, you qualify for a 0.06% annual mortgage premium. The first year, you'll need to pay $145 a month ($1,740 / 12).

Mortgage Insurance Premium vs. Private Mortgage Insurance (PMI)

The first difference between MIP and PMI is the type of borrower and mortgage they're available for. FHA loans don't require the borrower to pay private mortgage insurance (PMI). Instead, you'll pay MIP. However, if you obtain a conventional loan and put down less than 20 percent, you’ll pay for private mortgage insurance (PMI). 

The other key difference between PMI and MIP is the duration. You won’t have to pay PMI for the entire loan term. Once you have 20% equity in the home, the lender will allow you to drop PMI. In contrast, MIP is usually required for the entire loan duration.  

How Much Does Mortgage Insurance Cost?

When calculating how much mortgage insurance costs, you'll need to calculate for both upfront MIP and annual MIP. 

Let's take standard numbers. Upfront MIP is 1.75%, and the annual payment is between 0.15% and 0.75% of the loan amount. For the sake of this example, let's take the maximum. If you buy a home for $400,000 with a down payment of 10% using an FHA loan, you'll also need to pay an upfront MIP of $6,300 ($360,000 * .0175 = $6,300). In addition, you'll need to budget $2,700 a year, or $225 a month for the first year. As you pay off the mortgage and build equity in the home, your annual MIP will decrease. 

Can You Cancel Mortgage Insurance?

With a new FHA loan, here's the rules:

If you get a 30-year FHA loan with a 3.5% down payment, you’ll pay MIP for the entire term or until you pay off the loan. If you put down at least 10%, you’ll pay for 11 years.

The FHA has changed its rules more than once, so different rules apply depending on when you get the loan. Here is a summary of the different rules:

• Loan origination before Dec. 31, 2000: You'll pay MIP for the ensure term

• FHA loans originated between Dec. 31, 2000, and June 3, 2013: You'll pay MIP for five years or can cancel with a 78% loan-to-value (LTV) ratio.  

• For loans originated after June 3, 2013: You'll need to pay MIP for the entire loan term with less than 10% down payment. With a 10% down payment or higher, you'll pay MIP for 11 years from the loan start date. 

Can You Avoid Mortgage Insurance?

Avoiding mortgage insurance for FHA loans is impossible. However, you can lower it with a larger down payment, shorter loan terms, or by making additional principal-only payments. Other options:

• Get down payment assistance: With a down payment assistance program, you could reach the 10% down payment value, meaning you'll pay MIP for 11 years instead of the entire loan term.  

• Put 20% down: If you have the savings for a 20% down payment, consider working to build your credit score and qualify for a conventional mortgage. With a 20% down payment, you won't have to pay MIP or PMI. 

• Consider other loans: If you’re an eligible service member or buying in a rural area, you could get a VA or USDA loan. These offer more flexible terms. With a VA loan, you could get the mortgage with no money down. With a USDA loan, there's no mortgage insurance requirement.

• Refinancing: Even if you can’t avoid FHA mortgage insurance, you could refinance in the future with 20% down for a conventional loan. However, this is only a good idea if interest rates drop or you can qualify for lower interest rates from a higher credit score. 

What Are the Tax Implications of Qualified Mortgage Insurance Premiums?

In previous tax years, you could deduct MIP payments if you had an income below the stated maximum, itemized your deductions, and met other requirements. However, Congress has phased out these deductions, so there are no specific tax deductions for paying MIP. 

Compare the Best FHA Lenders From Benzinga’s Top Providers

You can find some of the best FHA loan options from Benzinga's top lenders here:

Final Tips on Mortgage Insurance Premiums 

Mortgage insurance premiums are designed to provide extra assurance to lenders offering mortgages to higher-risk borrowers. If you cannot qualify for a conventional loan, the cost of MIP is usually worth the convenience of purchasing a home and building equity — plus appreciation — over time. 

Carefully compare mortgage lenders, interest rates, and total costs to find the best available offer. Remember to look carefully at your budget to avoid overextending your finances with a difficulty-to-afford mortgage. Finally, you can always make additional principal-only payments, biweekly mortgage payments, or refinance your mortgage later for better terms. 

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