You can use the FHA Mortgage Insurance Calculator to calculate your estimated Up Front Mortgage Insurance, Monthly Mortgage Insurance and monthly payments.
For first-time homebuyers, mortgage insurance payments may seem like a complex topic and raise basic questions: Why am I required to pay more than one type of mortgage insurance? What’s the difference between Up Front and Monthly Mortgage insurance? How much will all this cost me?
To help simplify, your FHA loan requires you to pay the following types of mortgage insurance:
The good news is you don’t need to provide any cash up front or out-of-pocket costs when you sign your mortgage. You can simply choose to roll both insurance amounts into your overall monthly mortgage payment.
If you choose an FHA Loan, you will be required to pay “up-front” mortgage insurance due at the time you take out the loan – an amount equal to 1.75% of the loan. This amount enables financial institutions that issue FHA loans to provide financing to customers who may not qualify for a conventional loan.
But the word “up front” doesn’t mean that you will need to pay the amount out of pocket or even need extra cash at the time of closing. Most often, the amount of the up-front premium is included with the overall mortgage amount. This means that it may result in a slight increase to your monthly mortgage payment.
Also, if your home is sold within the first 5 to 7 years of owning it, your up-front mortgage premium may be refunded, on a pro-rated basis. When homeowners with an FHA loan use the FHA Streamline Refinance program within 3 years of closing, a portion of the up-front premium paid is refunded, ranging from 10% to 68% of the amount.
While Up-front Mortgage Insurance is the amount you pay up front at the time of closing, you also will pay a monthly insurance premium as part of your mortgage loan. This is something you don’t need to worry about as a separate payment, since it is usually included in your overall monthly mortgage payment.
How much you pay in mortgage insurance depends on several factors, including the term or length of your loan and how much down payment you are willing to make. For example, as of 2015, if you put down 3.5% as a down payment on a 30-year loan, you would pay annual mortgage insurance that costs 0.85% of the loan amount.
How your monthly insurance amount is calculated: the amount of the annual insurance divided by 12 months.
In 2015, under an executive action by the Obama Administration, the FHA lowered its annual mortgage insurance premiums by 50 basis points, from 1.35% to 0.85%. This was the first reduction made since 2001, and took place one year after the FHA received $1.7 billion from the U.S. Treasury.
The goal was to “make mortgages more affordable and accessible for creditworthy families,” according to the White House. For a first-time homebuyer, the reduction translated into a $900 reduction in their annual mortgage payment.
You may have heard the term “PMI” or private mortgage insurance. This is for all other loans that are not backed by the FHA.
The FHA monthly mortgage insurance differs from PMI in some critical ways. For one, FHA insurance tends to cost more than private mortgage insurance for a non-FHA loan. Also, you can expect to pay the monthly insurance premium for an FHA loan for the life of the loan. However, PMI can be canceled when you have reached 20% equity – or paid off a total of 20% of the value of your home.
In some cases, a conventional loan with PMI for those able to afford a 20% down payment may be less expensive than an FHA Loan – from 0.3% to 1.15% of the loan, with no up-front fee. In addition, if you are a Veteran, there are exclusive loan and refinance options available to you from the Office of Veterans Affairs. It’s important to discuss your loan options with a trusted financial advisor.
After using the FHA Mortgage Insurance Calculator, consult one of our licensed refinance specialists to understand all the factors that may affect the insurance calculation and options available for meeting your homeownership needs.
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