It is expensive, but you get a much lower rate because the investors are insured. You also get better terms, such as a lower down payment.
The FHA program charges 2 insurance premiums. One is an Up Front Premium which currently equals 1% of the loan amount (thus if you are borrowing $100,000, the UpFront Mortgage Insurance Premium or UFMIP is $1,000). This UFMIP is disclosed to you on your Good Faith Estimate as a closing cost and it affects the APR you will find on the Truth In Lending by making that APR substantially higher than a similar Conventional loan with Private Mortgage Insurance (PMI).
While the UFMIP is a closing cost, it is always financed into the loan. In the example cited above for a $100,000 loan with $1,000 UFMIP, therefore, the total loan at closing would be $101,000. So while the UFMIP is a closing cost, you do not pay it in cash at closing.
The second FHA Insurance premium is MMIP or Monthly Mortgage Insurance Premium. If your down payment is less than 5% the MMIP is calculated as 1.15% of the base loan amount divided by 12 months. From our example above, therefore, $100,000 X 1.15%/12= $95.83 monthly. The MMIP is incorporated into your monthly payment for your mortgage, in other words, the check you'll write to pay your mortgage every month.
You must pay the MMIP until you meet 2 conditions:
1. On time payments for a minimum of 5 years
2. The principal balance of your loan equals 78% of the original purchase price of the house when you closed. Therefore you must have paid in a total of 22% of principal (including your original 3.5% Down Payment at closing).
Just wanted to add a couple of other items.
While I work in Orange County, California and can't speak specifically to your area, FHA loans require an initial mortgage insurance premium of just under 2% (points) and then the monthly premium. So this initial payment will be a large chunk of the costs.
Also, in Califronia, prorated property taxes must be prepaid in escrow. This amount varies with the date of closing but can often be a significant portion of the annual total. Do you know how this is calculated in your area?
As mentioned in prior by Suzanne, all costs must be clearly disclosed and explained to buyers. If you don't get the answers you need, escalate!
And, yes, why don't you have a HUD1? This would explain everything.
And, WOW! you are paying 3.9% property taxes!
And, $5300 is about right for Closing Costs, but that should INCLUDE the upfront Insurance and Escrow Fee.
And, the Title Company provides the HUD1, but the Lender provides the GFE: Compare the two and sit down with the Title Company and your Realtor and go over the figures. It sounds to me that someone may be socking it to you in up-front fees. (I'm not talking ACCURACY, I'm talking socking it to you!
Good luck and may God bless