MIP (Mortgage Insurance Premium)

How FHA Mortgage Insurance Premiums Really Work

Mortgage Insurance Premiums (MIP) are unique to FHA loans. They are not the same as the private mortgage insurance (PMI) you see on many conventional loans, and they follow their own set of rules.

With a typical FHA loan, you pay MIP in two ways:

• Upfront MIP (UFMIP): A one-time charge, usually 1.75% of the base loan amount. Most borrowers roll this into the loan balance instead of paying it in cash at closing.
• Annual MIP: An ongoing charge that is calculated as a percentage of your outstanding loan balance each year, then divided into 12 monthly installments and added to your mortgage payment. Common ranges are roughly 0.45% to 1.05%, depending on your loan amount, term, and down payment.

The specific MIP factors for your loan depend on:

• Loan term (15-year vs. 30-year)
• Loan-to-value ratio (LTV) at closing

Because of these variables, two borrowers could buy homes at the same price and see different MIP costs. A shorter loan term or larger down payment usually results in a lower annual MIP rate.

It is also important to understand that FHA sets these rules and can change them over time. If you are comparing information online, make sure you are looking at current FHA guidelines and not older charts or examples.

Costs, Timelines, and How to Reduce What You Pay

MIP affects the total cost of your mortgage, so it is worth understanding how long you will pay it and which levers you can pull to reduce the impact.

How long MIP typically lasts

For many newer FHA loans, MIP is not tied to the simple idea of "20% equity." Instead, the rules depend on when the loan was originated, your loan term, and your original down payment:

• Older FHA loans may have automatic MIP cancellation once a certain equity level and payment history are met, based on past HUD rules.
• Newer FHA loans often require MIP for a minimum number of years, and in some cases for the full life of the loan, regardless of how quickly you build equity.

Because of these differences, you should not assume your MIP will drop off simply because you reach 20% equity. The safest approach is to review your closing documents or speak with your lender or servicer about the specific cancellation rules that apply to your loan.

Ways to reduce the long-term cost of MIP

Even though FHA sets the base rules, you still have options to manage how much you pay over time:

• Increase your down payment if possible. A higher down payment can lower your annual MIP rate and, depending on program rules at the time, may also shorten how long MIP applies.
• Consider a shorter loan term. A 15-year FHA loan can carry lower MIP factors than a 30-year term, although the monthly payment will be higher.
• Monitor your equity and interest rates. If your home value rises or you pay down your balance quickly, you may eventually be able to refinance into a conventional loan without monthly mortgage insurance, provided you meet the lender's credit and equity requirements.
• Compare FHA to conventional at the outset. In some cases, an FHA loan with MIP is the most accessible path to homeownership. In other cases, a conventional loan with PMI that drops off more predictably may be less expensive over the long term.

The key is to treat MIP as one piece of your overall financing strategy. Understand the upfront and ongoing costs before you close, and revisit your options as your income, home value, and interest rates change.