FHA MIP Mortgage Insurance Premium 2021CASAPLORERTrusted and Transparent
What is FHA MIP (Mortgage Insurance Premium) and do I need to get it?
There are two major types of mortgage insurance in the US: Private Mortgage Insurance or PMI, which is used for conventional loans, and Mortgage Insurance Premium or MIP which is for FHA loans.
FHA Mortgage Insurance Premium or MIP is similar to PMI and is an additional payment on top of the mortgage to FHA to protect them in case you cannot make your monthly payments.
FHA MIP is required for all FHA insured loans because of their lower required down payment. The cost of the FHA MIP is as follows:
- Upfront fee of 1.75% of the total loan amount
- Annual fee between 0.45% to 1.05% depending on original loan amount, size of down payment and term of the loan.
There are different options for payment, you can either pay the FHA MIP upfront fee at closing or you can choose to include it in your loan amount, resulting in increased FHA mortgage payments. The FHA MIP annual fee is included in your monthly mortgage payments.
Example of FHA Mortgage Insurance Premium for a $100,000 Mortgage
For a mortgage loan of $100,000, you will need to pay 1.75%, or $1,750, as your upfront MIP premium. You can pay this at closing or put it into your mortgage, where it will be amortized over your mortgage term. For a 30-year term and loan-to-value (LTV) ratio of 96.5%, you will also have to pay an annual MIP of 0.85%.
For a 30-year fixed mortgage at 3% interest, your initial $100,000 mortgage will have monthly payments of $422. The annual MIP will be $68 a month, increasing your monthly payment to $490 a month. If you choose to put your upfront insurance premium as part of your mortgage, that will increase your monthly payments by an additional $7 to $497.
The Loan-to-Value (LTV) Ratio signifies the mortgage amount you are borrowing against the appraised value of the house. For example, if the appraised value of the house is $100,000 and the down payment is 10% or $10,000 ($100,000 * 10%) then the mortgage amount is $90,000 ($100,000 - $10,000), the LTV is $90,000/$100,000 which is 90%. Therefore, as the LTV increases the mortgage risk for the lender also increases.
What is my Annual FHA premium and how is it determined?
As mentioned above the annual cost is variable and can change based on the size of the loan, down payment and term of the loan. There are different sets of fees for mortgage terms longer than 15 years (e.g. 30-year fixed rate mortgages) and mortgage terms equal to or less than 15 years.
Mortgage Term of More than 15 Years
|Loan Amount||LTV||MIP or bps||Duration of Payment|
|Less than or equal to $625,000||≤ 90%||0.8% or 80||11 years|
|> 90% but ≤ 95%||0.8% or 80||Entire Mortgage Term|
|> 95%||0.85% or 85||Entire Mortgage Term|
|Greater than $625,000||≤ 90%||1% or 100||11 years|
|> 90% but ≤ 95%||1% or 100||Entire Mortgage Term|
|> 95%||1.05% or 105||Entire Mortgage Term|
Your Loan-to-Value (LTV) Ratio affects the FHA MIP annual fee because a higher LTV means a smaller down payment resulting in greater risk for the lender and hence higher fee. If the LTV is less than 90% the MIP fee is 0.8%, as LTV increases to greater than 95%, the fee increases to 0.85%.
Duration of Payment refers to the length of the period you have to pay the annual FHA MIP. The minimum duration is 11 years if you have a lower LTV and the maximum is the term of the loan or the entire period. For example, if you have a 30-year fixed rate mortgage and your LTV is greater than 90%, then you have to pay the FHA MIP annual fee for all 30 years.
Mortgage Term of Less than or Equal to 15 Years
|Loan Amount||LTV||MIP or bps||Duration of Payment|
|Less than or equal to $625,000||≤ 90%||0.45% or 45||11 years|
|> 90%||0.7% or 70||Entire Mortgage Term|
|Greater than $625,000||≤ 78%||0.45% or 45||11 years|
|> 78% but ≤ 90%||0.7% or 70||11 years|
|> 90%||0.95% or 95||Entire Mortgage Term|
If your LTV is less than 90%, you will have to pay an annual FHA MIP of 0.45% for a minimum duration of 11 years. If your LTV is greater than 90%, you will have an FHA MIP of 0.7% and for the whole mortgage term.
For a loan amount greater than $625,000, if you have an LTV less than 78%, your FHA MIP can be as low as 0.45%, which is the lowest rate for an FHA loan. As the LTV increases the MIP increases and the duration becomes the length of the mortgage.
Is FHA MIP Tax Deductible?
Yes, FHA MIP is Tax deductible and can be filed in your 2020 taxes to reduce your overall payment. However, only the upfront fee is tax deductible and can be claimed on your tax returns, whereas the annual fee is not tax deductible.
What is the difference between Private Mortgage Insurance (PMI) and Mortgage Insurance Premium (MIP)?
Private Mortgage Insurance (PMI) and FHA Mortgage Insurance Premium (MIP) both have the same purpose: to protect the lender in the case the borrower cannot cover their mortgage payments.
|Private Mortgage Insurance (PMI)||Mortgage Insurance Premium (MIP)|
|Lender||Private institutions like banks||FHA approved institutions|
|Down Payment||<20%||All FHA loans require MIP|
|Credit Score||Affects premium||Does NOT affect premium|
|Structure||Annual fee||Upfront fee + Annual fee|
|Rate||Annual fee: 0.5-2%||Upfront fee: 1.75% Annual fee: 0.45-1.05%|
|Length||Removed when LTV is 78% or when borrower has 20% home equity||Less than 10% Down payment: Entire term of the loan More than 10% Down payment: 11years|
PMI applies to conventional loans given by banks and private institutions where the down payment is less than 20%. Whereas MIP is referred to loans which are guaranteed by the FHA, the down payment can be as low as 3.5% in some situations. In both cases, the insurance costs are passed on to the buyers, but in the case of PMI, the mortgage insurance is supplied by a private mortgage insurer.
PMI rate on conventional loans is affected by your credit score, such that a higher credit score will result in a better rate.Whereas FHA MIP rate is set and does not get impacted by your credit score.
Structure of insurance premiums also defer between PMI and MIP. PMI has one fee which is 0.5-2% of the loan amount per year, whereas for FHA loans, MIP has an upfront fee of 1.75% and annual fees ranging from 0.45% to 1.05% on original loan amount.
PMI on loans can be removed from the mortgage once the loan-to-value (LTV) ratio reaches below 78% or the buyer has 20% stake in the house. However, for FHA MIP, if the down payment is less than 10% then the annual premium will have to be paid for the entirety of the term; if the FHA down payment is at least 10% then MIP can be removed after 11 years of payment.