This year, HUD, through the Federal Housing Administration (FHA), actually lowered the annual mortgage insurance premium for most new borrowers by 0.30 percentage points from 0.85 percent to 0.55 percent. That means buyers with FHA-backed mortgages could save an average of $800 a year.
Still, homebuyers interested in applying for an FHA loan should know how much MIP they will have to pay in addition to the mortgage principal and interest. Here's what you need to know about MIP, including the interest rate you can expect to pay and how the fees actually benefit home buyers who qualify for an FHA loan.
What is an MIP?
In essence, an MIP is the government's insurance policy against FHA loan requirements. Because the down payment on an FHA loan can be as little as 3.5% of the total price, the government needs additional financial protection.
"Mortgage insurance is designed to protect the lender, not the borrower," said Brian Sullivan, a media relations specialist at the Federal Deposit Insurance Corporation who previously worked at the Federal Housing Administration. "Fha loans are insured to protect the federal government in the event that a borrower defaults."
How does an MIP work?
When you are approved for a loan, the housing authority will require you to pay a prepayment mortgage at the end of the loan, as well as an annual mortgage that is calculated annually and paid monthly.
Currently, UFMIP's interest rate is 1.75% of the amount of your Housing Authority loan. For example, if you borrow $250,000, your upfront costs would be $4,375. Currently, most FHA loans have an annual premium of 0.55%.
UFMIP will be part of the total closing cost, which includes your mortgage principal, interest, property taxes and homeowner's insurance. You can also roll over the cost of UFMIP to escrow payments.
What are the benefits of the Mortgage Loan Scheme to owners?
The MIP protects lenders, but the fee also allows buyers to buy homes with a down payment of as little as 3.5%. In essence, MIP puts home ownership within reach of many people who cannot afford it.
"Lenders are more willing to finance a purchase or refinance home because they know they are protected from losses," Mr. Sullivan said.
Can you cancel the MIP policy?
Most homeowners will maintain their MIP for the duration of the FHA loan. But there are ways to cancel or give up your MIP.
If you took out an FHA loan after June 3, 2013, and put 10 percent or more down when you bought a home, the MIP may be due after 11 years of on-time payments.
You can also refinance your FHA loan into a traditional loan. It's important to note that if you don't have 20 percent equity in your home, you will still need to purchase private mortgage insurance until you reach that threshold.
