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Chris Sorensen's Blog

By Chris Sorensen | Real Estate Pro in California

How To Calculate & Get Rid Of FHA Mortgage Ins.(Updated 1/25/12)

Adapted from an article written by Dan Green dan.green@waterstonemortgage.com

FHA Upfront Mortgage Insurance Premiums

The FHA’s current upfront mortgage insurance premium (UFMIP) is 1 percent of your loan size. For example, if you want to apply for an FHA purchase mortgage and your loan size is $300,000, then your Upfront MIP will be equal to $3,000.

Upfront MIP is not paid as cash. It’s automatically added to your loan balance by the FHA. Therefore, your final loan size in the example above will be $303,000.

Furthermore, upfront MIP is not used in your FHA loan-to-value calculation. This means that you can make a 3.5% down payment on your purchase, add the 1 percent UFMIP to your loan size, and still meet the FHA’s low down payment guidelines.

Upfront MIP is paid to the FHA upfront, at closing, and never paid again. Hence the name, “upfront” MIP. However, because UFMIP is added to your loan balance, you do pay mortgage interest on it for the life of your loan.

FHA Annual Mortgage Insurance Premiums

The FHA’s other type of mortgage insurance is paid monthly. Called Annual Mortgage Insurance Premiums (MIP), it’s paid as a part of your mortgage statement.

Annual MIP is required on all FHA mortgages and premiums vary according to your FHA loan’s individual characteristics. The FHA’s MIP table is below :

•15-year loan terms with loan-to-value over 90% : 0.50 percent annual MIP
•15-year loan terms with loan-t0-value under 90% : 0.25 percent annual MIP
•30-year loan terms with loan-to-value over 95% : 1.15 percent annual MIP
•30-year loan terms with loan-to-value under 95% : 1.10 percent annual MIP

As a real-life example, a 30-year fixed rate FHA mortgage in a high-cost area such as Loudoun County, Virginia; or Bethesda, Maryland may be for as much as $729,750. If the FHA mortgage is a purchase and the buyer is putting the minimum 3.5% down on the home, the annual MIP is 1.15 percent, or $699 per month.

On a 15-year mortgage, the MIP falls to $304 per month.

How To Get Rid Of Your FHA Mortgage Insurance

The schedule for getting rid of FHA mortgage insurance changes by loan term.
•30-year loan term : Annual MIP is automatically canceled once the loan reaches 78% loan-to-value and monthly MIP has been paid for at least 60 months.
•15-year loan term : Annual MIP is automatically canceled once the loan reaches 78% loan-to-value. There is no requirement that monthly MIP be paid for at least 60 months.

In other words, if you have a 30-year fixed rate FHA mortgage, you must pay mortgage insurance for at least 5 years before it can go away — regardless of your loan balance. By comparison, if you have a 15-year fixed-rate FHA mortgage, your mortgage insurance is removed as soon as your LTV is low enough.

No action is needed on your part — the FHA handles MIP removal automatically.

Also, note that the FHA does not allow a new appraisal to determine whether your loan is at 78% loan-to-value. The 78% LTV is based on the lesser of your purchase price, or its original appraised value.

At today’s mortgage rates, a 15-year FHA mortgage on which the minimum 3.5% downpayment was made should pay down to 78% of the original purchase price within 26 months. A 30-year fixed will take 9 years to reach the same point.

***Due to questions I am offering the following clarification directly from HUD.Gov;

Cancellation of the FHA monthly mortgage insurance premium (MIP) is based on several factors including the loan term, loan-to-value (LTV) and regulations in place when the loan is closed.
For loans closed January 1, 2001 or later MIP will be automatically cancelled when the LTV reaches 78% under the following terms.

Loan Terms Longer Than 15 Yrs
• To be eligible for automatic cancellation the monthly MIP must have been paid for a minimum of five years.

Loan Terms 15 Years or Less
• There is no minimum time period for which the MIP must have been paid (five year requirement does not apply).
• If the LTV is 78.00% or less at loan closing it is exempt from MIP

• The MIP is collected monthly for the life of the loan

• MIP cancellation does not apply to loans that are not insured by the Mutual Mortgage Insurance (MMI) fund. Generally, loans closed prior to January 1, 2001 will not be eligible for cancellation of MIP, which is collected as part of the monthly mortgage payment.
• Cancellation of the annual MIP is normally based on the scheduled amortization of the loan. However, in cases where the loan payments have been accelerated or modified, cancellation can be based on the actual amortization of the loan as provided to FHA by the servicing lender.
• Mortgage insurance may also be terminated via payment in full, conveyance for insurance benefits, or voluntary termination upon agreement between the borrower and lender.
• Although the MIP is cancelled, the contract of mortgage insurance remains in force.

Mortgagee Letter 2011-35 http://portal.hud.gov/hudportal/documents/huddoc?id=11-35ml.pdf

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