How Does FHA Mortgage Insurance Work?

FHA mortgage insurance helps insure against default. The insurance works similar to the way that private mortgage insurance works in the traditional lending industry. When you buy a house through the FHA, you will be required to pay a mortgage insurance premium on the front end and every month. Here are the basics behind FHA mortgage insurance.

Benefits of Mortgage Insurance

The main benefit of mortgage insurance is that it makes the loan more attractive to lenders. This means that it will be easier for you to get approved for a loan. FHA loans traditionally have low down payments associated with them. When you combine this with the loan, you are making it attractive for you and the lender.

Costs of Mortgage Insurance

In order to secure mortgage insurance for your FHA loan, you will be required to pay an upfront mortgage premium and a monthly premium. Typically, the upfront mortgage premium can range from 1.50% to 2.50% of the mortgage balance. Monthly premium amounts vary between .50% to .55% of the balance.

To calculate your monthly Mortgage Insurance Premium, or MIP, take the mortgage and multiply it by .55%. Then take that number and divide it by 12. For example a mortgage of $200,000 will have a monthly MIP amount of $91.67 per month. This amount is added to your mortgage payment each month, without exception.

When does monthly MIP end on an FHA loan?

MIP on FHA loans is a type of mortgage insurance that must be paid by the borrower. This payment is necessary in order to guarantee that the mortgage will be paid. If the homeowner does not come through with the payments, the insurance company will pay back the lender. With FHA loans, you have to continue making this additional payment for the first five years after you begin your mortgage. After five years have passed, you can talk to the mortgage lender about eliminating this insurance coverage. Your mortgage has to have been in good standing the entire time to eliminate it.

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