Federal Housing Administration (FHA) loans are a popular choice for many homebuyers, especially first-timers, due to their more lenient credit and down payment requirements. However, FHA loans also come with the requirement of mortgage insurance, which protects the lender in case the borrower defaults on the loan. In this article, we will explain how to calculate FHA mortgage insurance and provide insight into its function in the home buying process.

1. Understanding FHA Mortgage Insurance:

FHA mortgage insurance consists of two parts: an upfront mortgage insurance premium (UFMIP) and an annual MIP, which is actually paid monthly as part of your loan payment. Both premiums are calculated as a percentage of your initial loan amount.

2. Calculating Upfront Mortgage Insurance Premium (UFMIP):

The UFMIP is a one-time premium that you will pay at closing. As of 2020, the UFMIP rate is 1.75% of your base loan amount. To calculate your UFMIP, follow these steps:

a) Determine your base loan amount: This is usually equal to the purchase price minus your down payment.

b) Calculate your UFMIP: Multiply your base loan amount by 1.75% (0.0175).

c) Add the calculated UFMIP to your base loan amount. This new total becomes your final insured loan amount.

3. Calculating Annual Mortgage Insurance Premium (MIP):

The annual MIP varies depending on factors such as original loan amount, length of the loan term, and the loan-to-value (LTV) ratio at origination. Be aware that as of 2013, FHA requires most borrowers to maintain MIP for the entire loan term if their initial LTV is greater than 90%. Here’s how to calculate your annual MIP:

a) Determine your loan term (either 15 or 30 years) and LTV ratio (as a percentage).

b) Locate your MIP chart: You can find the latest FHA MIP rates on the HUD website or consult your lender for the most recent information.

c) Identify your MIP rate from the chart based on your loan term and LTV ratio.

d) Multiply your base loan amount by the determined MIP rate.

e) Divide the result by 12 to find your monthly MIP payment. This amount will be included in your monthly mortgage payment.

Conclusion:

Understanding how to calculate FHA mortgage insurance is crucial for potential homebuyers considering this loan option. Always remember that while FHA loans provide numerous benefits, mortgage insurance can add a significant cost to your overall loan expense. Be sure to factor in these costs when deciding whether an FHA loan is the right choice for you.