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FHA Mortgage Insurance Premiums: A Benefit?

Offering More Than Just a Premium Price!!

Orange County, CA – Mention the phrase mortgage insurance premium, and the first image that comes to mind is $$$$. But premium prices also have some premium benefits. Spending more on FHA’s mortgage insurance premiums can be a great approach for those unable to come up an initial investment of 20% in their property. It’s for this very reason that mortgage insurance premiums exist, and for some people they can be the difference between buying and renting.

Of course, there are many different loan options for purchasing a home. Using an FHA product can often be advantageous. Here we look at FHA Mortgage insurance premiums, their cost, and what they can do for you.

The Federal Housing Administration is different from Freddie Mac and Fannie Mae when it comes to mortgages. The FHA doesn’t buy mortgages, but in fact is an insurer of mortgages. The FHA set out mortgage guidelines under which other banks can choose to underwrite mortgages. If the lender follows those guidelines then FHA will endorse the loan.

If a loan that was endorsed by FHA goes into default from, the agency is there to repay the bank’s loss. This payment comes from a fund called the MMI fund, or Mutual Mortgage Insurance fund. This is funded through two types of mortgage insurance paid in by borrowers with FHA loans. The two groups are Upfront Mortgage Insurance Premium, (UFMIP) and the annual mortgage insurance premium (MIP). This insurance allows FHA to offer home loans where conventional lenders would pass. They require a small down payment and have the most flexible underwriting guidelines. These factors increase the risk of the loan but, in most cases, this is offset by the insurance. Therefore, paying these premiums offers benefits that would otherwise be unavailable to many current and prospective homeowners.

At the moment, the FHA is charging 1.75% of your loan size for anyone who is paying UFMIP. This means that if you were seeking an FHA loan of $300,000, the upfront cost would be $5,250. This figure can be paid in cash or financed into the loan. Since most FHA borrowers are attracted by its low down payment requirement of 3.50%, most finance the UFMIP on top of the base loan amount. This means that your overall loan amount will be $305,250. It’s also worth noting that your UFMIP is not factored in when considering your loan to value calculation. So you can go for a 3.5% down-payment, add the Upfront MIP to the loan, and meet the minimum down payment guidelines that are in place.

In addition to the one time up front premium, FHA charges annual mortgage insurance that is paid monthly.  This is included with your standard mortgage payment.

The current MIP schedule is:

  • .6% annual MIP for 15 year loan terms with LTV over 90%,
  • .35% for 15 year loan terms with LTV less than 90%.
  • 30 Year loan terms with LTV over 95% is 1.25%, and
  • 30 year loans with LTV under 95% are coming in at 1.2% annual MIP.

You can also expect to pay a premium of .25% if you have a loan in excess of $625,000. This schedule will be one of the changes that FHA is making come April 1, 2013.

Whether an FHA mortgage is right for you depends on your circumstances. It’s a good fit for some but not for others. Speak to us today about your needs in terms of the mortgage market and we will be happy to assist you.

Scott Storace

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