FHA Mortgage Insurance: Why It's Necessary And So Expensive Bankrate Caret RightMain Menu Mortgage Mortgages Financing a home purchase Refinancing your existing loan Finding the right lender Additional Resources Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Bank Banking Compare Accounts Use calculators Get advice Bank reviews Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Credit Card Credit cards Compare by category Compare by credit needed Compare by issuer Get advice Looking for the perfect credit card? Narrow your search with CardMatch Caret RightMain Menu Loan Loans Personal Loans Student Loans Auto Loans Loan calculators Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Invest Investing Best of Brokerages and robo-advisors Learn the basics Additional resources Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Home Equity Home equity Get the best rates Lender reviews Use calculators Knowledge base Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Loan Home Improvement Real estate Selling a home Buying a home Finding the right agent Additional resources Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Insurance Insurance Car insurance Homeowners insurance Other insurance Company reviews Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Retirement Retirement Retirement plans & accounts Learn the basics Retirement calculators Additional resources Elevate your Bankrate experience Get insider access to our best financial tools and content Advertiser Disclosure

Advertiser Disclosure

We are an independent, advertising-supported comparison service. Our goal is to help you make smarter financial decisions by providing you with interactive tools and financial calculators, publishing original and objective content, by enabling you to conduct research and compare information for free - so that you can make financial decisions with confidence.
Bankrate has partnerships with issuers including, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover.

How We Make Money

The offers that appear on this site are from companies that compensate us. This compensation may impact how and where products appear on this site, including, for example, the order in which they may appear within the listing categories. But this compensation does not influence the information we publish, or the reviews that you see on this site. We do not include the universe of companies or financial offers that may be available to you. SHARE: Ursula Page/Adobe Stock March 31, 2022 Checkmark Bankrate logo How is this page expert verified? At Bankrate, we take the accuracy of our content seriously. "Expert verified" means that our Financial Review Board thoroughly evaluated the article for accuracy and clarity. The Review Board comprises a panel of financial experts whose objective is to ensure that our content is always objective and balanced. Their reviews hold us accountable for publishing high-quality and trustworthy content. Mitch Strohm is a regular contributor for Bankrate. Based out of Nashville, Tennessee, he has been reporting on the finance space for more than 12 years. Since 2010, Mitch has written and edited articles for Bankrate on topics including mortgages, banking, credit cards, loans, home equity and personal finance. His work has also been seen on sites including Business Insider, Clark Howard, Yahoo Finance, Fox Business, Interest.com and Bankaholic.com. Suzanne De Vita is the mortgage editor for Bankrate, focusing on mortgage and real estate topics for homebuyers, homeowners, investors and renters. Robert R. Johnson, Ph.D., CFA, CAIA, is a professor of finance at Creighton University and chairman and CEO of Economic Index Associates, LLC. Bankrate logo

The Bankrate promise

At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict editorial integrity, this post may contain references to products from our partners. Here's an explanation for how we make money. Bankrate logo

The Bankrate promise

Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. We’ve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next. Bankrate follows a strict , so you can trust that we’re putting your interests first. All of our content is authored by and edited by , who ensure everything we publish is objective, accurate and trustworthy. Our mortgage reporters and editors focus on the points consumers care about most — the latest rates, the best lenders, navigating the homebuying process, refinancing your mortgage and more — so you can feel confident when you make decisions as a homebuyer and a homeowner. Bankrate logo

Editorial integrity

Bankrate follows a strict , so you can trust that we’re putting your interests first. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions.

Key Principles

We value your trust. Our mission is to provide readers with accurate and unbiased information, and we have editorial standards in place to ensure that happens. Our editors and reporters thoroughly fact-check editorial content to ensure the information you’re reading is accurate. We maintain a firewall between our advertisers and our editorial team. Our editorial team does not receive direct compensation from our advertisers.

Editorial Independence

Bankrate’s editorial team writes on behalf of YOU – the reader. Our goal is to give you the best advice to help you make smart personal finance decisions. We follow strict guidelines to ensure that our editorial content is not influenced by advertisers. Our editorial team receives no direct compensation from advertisers, and our content is thoroughly fact-checked to ensure accuracy. So, whether you’re reading an article or a review, you can trust that you’re getting credible and dependable information. Bankrate logo

How we make money

You have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey. Bankrate follows a strict , so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers. We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service. When you buy a home with an and don’t have at least 20 percent to put down, mortgage lenders require you to pay an FHA mortgage insurance premium, or MIP, which protects them from loss if you can’t repay the loan. FHA loans are attractive to some buyers because they come with lenient credit requirements, low closing costs and competitive interest rates. The added expense of FHA mortgage insurance, however, is a key drawback to this avenue of financing.

What is FHA mortgage insurance MIP

An FHA mortgage insurance premium (MIP) is an additional fee you pay to protect the lender’s financial interests in case you default on your FHA loan. FHA borrowers are required to pay two mortgage insurance premiums: one upfront at closing, and another annually for as long as you repay the loan, in most cases. By comparison, conventional loans with less than 20 percent down come with , charged every year until you have at least 20 percent equity in your home. This is different from FHA mortgage insurance, which doesn’t have the same equity cutoff. You might also encounter , which is not a requirement for an FHA loan or any other kind of mortgage. MPI is similar to disability or life insurance in that it pays your mortgage if you become disabled, lose your job or pass away.

How much does FHA mortgage insurance cost

FHA Upfront MIP: 1.75 percent of loan amount FHA Annual MIP: Varies based on the size, term and loan-to-value (LTV) ratio of the loan

FHA loans with terms longer than 15 years

Loan amount LTV Mortgage insurance premium in basis points Duration of insurance payments $625,500 or less 90% or less 80 (0.8%) 11 years 90% to 95% 80 (0.8%) Entire loan term More than 95% 85 (0.85%) Entire loan term More than $625,500 90% or less 100 (1%) 11 years 90% to 95% 100 (1%) Entire loan term More than 95% 105 (1.05%) Entire loan term

FHA loans with 15-year terms or shorter

Loan amount LTV Mortgage insurance premium in basis points Duration of insurance payments $625,500 or less 90% or less 45 (0.45%) 11 years More than 90% 70 (0.70%) Entire loan term More than $625,500 78% or less 45 (0.45%) 11 years 78% to 90% 70 (0.70%) 11 years More than 90% 95 (0.95%) Entire loan term

FHA simple or streamline refinances

Note: These premiums apply to FHA loans closed on or before May 31, 2009. Loan amount LTV Mortgage insurance premium in basis points Duration of insurance payments Any 90% or less 55 (0.55%) 11 years More than 90% 55 (0.55%) Entire loan term Upfront mortgage insurance premiums can be, and often are, financed into the loan amount, explains Peter Boomer, a mortgage executive with . Annual premiums are included in the borrower’s monthly mortgage payment. If you borrow $100,000 and roll the cost of FHA upfront MIP into your loan, your loan amount will increase to $101,750 (an additional 1.75 percent of the loan amount). Naturally, that increases your monthly payment, as well. On a $101,750 30-year at 4 percent, your monthly mortgage payment (excluding homeowners insurance and property taxes) would be $485, compared to $477 without financing the MIP. Tack on the annual premiums, too, and your monthly payment will rise further, adding another $72 per month, bringing the total to $557. That’s assuming you make a minimum down payment of 3.5 percent, in which case you’ll be charged an annual MIP rate of 0.85 percent.

How long will you pay FHA MIP

While the law has changed more than once on this issue, current guidance states that borrowers who put down less than 10 percent on an FHA loan must pay for FHA mortgage insurance until the entire loan term is over. If you put down at least 10 percent, however, you can have FHA MIP removed after 11 years of payments. “The length of time that a borrower pays the monthly mortgage insurance premium varies depending upon the original loan terms,” Boomer says. PMI on a conventional loan, on the other hand, can typically be cancelled once a homeowner has 20 percent equity in their home.

How to avoid FHA mortgage insurance

If you’re using an FHA loan program, you will pay mortgage insurance. All FHA loans involve mortgage insurance, either for the life of the loan or for a set number of years. You can avoid FHA mortgage insurance by: Using a different lending program – This could mean getting a conventional loan with a 20 percent down payment, but there are other options. One option is accepting an FHA loan and the MIP that it comes with, then once you’ve built enough equity in your home. Obtaining loan – LPMI can be an option if you’re not willing or able to make a 20 percent down payment. With this type of loan, the lender covers the PMI in exchange for a higher interest rate. Exploring a – With this type of loan, you make a 10 percent down payment, then get a second mortgage to add another 10 percent to your down payment. You wind up with a 20 percent down payment overall, avoiding PMI, but you’ll have to repay two loans. Looking into special programs – There are also some programs that allow borrowers to make a low down payment without PMI. These range from (for eligible members of the military) to programs directly from major banks and lenders.

How to get rid of FHA mortgage insurance

Paying for FHA mortgage insurance for 11 years or longer might sound like a drag, but the expense doesn’t have to last forever. Many borrowers use FHA loans as a stepping stone that can help them reach the dream of homeownership, says Gary Acosta, co-founder and CEO of the National Association of Hispanic Real Estate Professionals. From there, they take steps to and acquire more equity in their homes so they can refinance out of their FHA loan into a conventional loan with better terms. “The FHA is a wonderful starter loan but, at some point, it can also be beneficial to refinance out of it for lower monthly payments, including no [mortgage insurance premiums] or PMI,” Acosta says. It’s also possible to by paying down your mortgage, but that can take a significant amount of resources to do. Before paying off your loan, make sure to weigh the financial pros and cons.

Cost of FHA MIP vs PMI

The speed at which you can have mortgage insurance removed is obviously very different among FHA loans and conventional loans, but the costs are another key differentiator. The amount you pay for PMI can vary depending on your credit score and down payment amount. For borrowers with excellent or very good credit (FICO scores of 740 or higher), PMI payments can be lower. As described above, annual mortgage insurance premiums for FHA loans vary based on the loan term and loan amount.

Is FHA mortgage insurance tax-deductible

The was brought back at the end of 2019. Because of this, you might be able to itemize FHA upfront MIP for tax year 2021, and also retroactively for tax years 2018, 2019 and 2020. It’s best to speak with a tax professional, however, to ensure you’re maximizing this deduction if you’re eligible.

Pros and cons of FHA mortgage insurance

Here are some of the advantages of FHA MIP: Premiums are set – FHA mortgage insurance premiums don’t fluctuate according to credit score. Easier to qualify – FHA mortgage insurance helps borrowers who might not otherwise qualify for a conventional loan. With MIP, mortgage lenders are able to absorb more risk and therefore extend loans to less-creditworthy borrowers. Lower down payment – With the insurance, borrowers with a credit score of 580 and up can put down as little as 3.5 percent on an FHA loan. Those with scores between 500 and 579 can put down as little as 10 percent. Here are some of the disadvantages of FHA MIP: Adds to overall loan cost – The upfront and annual costs of FHA mortgage insurance increase both your total loan amount and monthly payment. Difficult to get rid of – Generally, there are only a couple of ways out of paying for FHA mortgage insurance — you can either refinance into a conventional loan or pay off your mortgage in full.

Bottom line

It’s understandable to worry about the high costs of FHA mortgage insurance. Forking over an upfront premium is already a tough pill to swallow, and paying additional premiums for years or even decades can really eat into your budget. FHA mortgage insurance doesn’t have to be paid forever, however, depending on your down payment amount or if you refinance out of the loan in the future. Investing in a home now could be a smart move, and an FHA loan could be what you need to make it happen. “First-time homebuyers who find it difficult to save for a down payment with a high debt-to-income ratio, such as college graduates with student loan debt, would find an FHA loan helpful,” Acosta says. With additional reporting by Holly Johnson and TJ Porter SHARE: Mitch Strohm is a regular contributor for Bankrate. Based out of Nashville, Tennessee, he has been reporting on the finance space for more than 12 years. Since 2010, Mitch has written and edited articles for Bankrate on topics including mortgages, banking, credit cards, loans, home equity and personal finance. His work has also been seen on sites including Business Insider, Clark Howard, Yahoo Finance, Fox Business, Interest.com and Bankaholic.com. Suzanne De Vita is the mortgage editor for Bankrate, focusing on mortgage and real estate topics for homebuyers, homeowners, investors and renters. Robert R. Johnson, Ph.D., CFA, CAIA, is a professor of finance at Creighton University and chairman and CEO of Economic Index Associates, LLC.

Related Articles