What is FHA Mortgage Insurance?
FHA mortgage insurance, or mortgage insurance premium (MIP), is an added cost you’ll need to consider when taking out an FHA loan.
There are two MIP costs: upfront and annual. Upfront MIP is a one-time payment required at closing (or added to the loan balance), while the annual MIP is a recurring yearly fee, divided into monthly installments, that continues throughout the loan term or until certain conditions are met.
In 2024, the upfront MIP rate is 1.75%, while the annual MIP ranges from 0.55% to 0.90%, depending on your loan amount and LTV ratio. Most borrowers will pay an annual MIP rate of 0.55%.
What is the purpose of MIP?
FHA mortgage insurance is paid to the Federal Housing Administration (FHA) and helps protect lenders if you can’t repay your loan. The FHA doesn’t lend money directly. Instead, they guarantee a portion of the loan to mortgage lenders, so if you default, the lender is reimbursed for some of their losses.
FHA loans are popular because they’re easier to qualify for than conventional loans, and mortgage insurance helps make this possible by allowing lenders to offer FHA loans to more people.
However, MIP adds to the total cost of your loan over time, so it’s important to consider it when comparing your loan options.
MIP vs. PMI
A common question borrowers ask is "What’s the difference between FHA’s MIP and conventional loan’s PMI?" Although MIP and PMI are both types of mortgage insurance, they apply to different loan types and have their own rules and costs. In fact, the policies surrounding mortgage insurance are the biggest difference between FHA vs. conventional loans.
-
MIP (Mortgage Insurance Premium): MIP is paid to the
Federal Housing Administration and is required for all FHA loans,
regardless of the down payment amount. However, if you put 10% down, you
can cancel MIP after 11 years. Borrowers pay both an upfront premium and
an annual premium (paid monthly) for the life of the loan, or at least
11 years.
- PMI (Private Mortgage Insurance): PMI is a monthly payment to mortgage companies required for conventional loans when the down payment is less than 20%. Unlike MIP, PMI can be canceled once the borrower reaches 20% equity in their home. PMI generally costs less than MIP and is easier to remove.
MIP vs. PMI Cost
Let’s look at a simple comparison to illustrate how MIP and PMI affect your monthly mortgage payment.
Imagine you’re buying a $250,000 home with a 5% down payment ($12,500), bringing the loan amount down to $237,500. Assuming a 0.5% PMI rate and a 0.55% annual MIP rate + the upfront annual fee, this is what the difference in mortgage insurance costs would look like:
| Loan Type | Upfront Insurance | Monthly Insurance |
|---|---|---|
| FHA (MIP) | $4,156.25 upfront | $108.81 per month |
| Conventional (PMI) | None | $98.96 per month |
In this example, since you didn’t put 10% down, you’d have to pay MIP for the life of the loan unless you refinanced into a different loan type, whereas with conventional, you could cancel mortgage insurance once you reached 20% equity.
As you can see, if you have limited savings or less appealing eligibility standards, an FHA loan makes sense, however, if you can qualify for conventional, it will likely save you money in the long run due to the lower mortgage insurance rates.
Annual FHA MIP Chart 2024
Below are the updated FHA MIP rates for 2024, split by loan term and LTV ratio. These rates help you estimate how much your MIP payments will add to your monthly mortgage payment. Though annual MIP rates have “annual” in the name, the premium is actually divided into monthly installments.
Annual MIP Rates for FHA Loans with a 15+ Year Term
| Loan Amount | LTV Ratio | Annual MIP Rate | Length of Payments |
|---|---|---|---|
| $726,200 or less | 90% | 0.50% | 11 years |
| $726,200 or less | 90 to 95% | 0.50% | Entire loan |
| $726,200 or less | 95% or more | 0.55% | Entire loan |
| $726,200 or more | 90% or less | 0.70% | 11 years |
| $726,200 or more | 90 to 95% | 0.70% | Entire loan |
| $726,200 or more | 95% or more | 0.75% | Entire loan |
Annual MIP Rates for FHA Loans with a 15-Year Term or Less
| Loan Amount | LTV Ratio | Annual MIP Rate | Length of Payments |
|---|---|---|---|
| $726,200 or less | 90% or less | 0.15% | 11 years |
| $726,200 or less | 90% or more | 0.40% | Entire loan |
| $726,200 or more | 78% or less | 0.15% | 11 years |
| $726,200 or more | 78% to 90% | 0.40% | 11 years |
| $726,200 or more | 90% or more | 0.65% | Entire loan |
Keep in mind the longer your loan term and the smaller your down payment, the higher your annual MIP rate will be.
How to Calculate MIP
To calculate your annual MIP, you will multiply your loan amount by your MIP rate.
Step #1: Multiply MIP by Your Original Loan Amount
Let’s say the loan amount is $200,000, and the annual MIP rate is 0.55%.
You would multiply 200,000 × 0.0055 = $1,100
Step #2: Divide Your Annual MIP by 12
Divide the annual MIP by 12 to get your monthly cost:
1,100 ÷ 12 = $91.671
This means the monthly MIP payment would be $91.67.
This monthly MIP payment is added to your monthly mortgage payment. Depending on your down payment at closing and your loan size, MIP must be paid for either the entire length of the loan or until you reach 11 years.
If your down payment is less than 10% at closing, you’re required to pay MIP for the entire length of the loan, regardless of loan size.
If your down payment is 10% or more, MIP must be paid for at least 11 years.
FHA Mortgage Insurance Removal
While it’s more challenging to remove MIP compared to PMI, there are several ways to eliminate it under certain circumstances:
1. Refinancing to a Conventional Loan
One of the most common ways to remove FHA MIP is to refinance into a conventional loan. Once you have enough equity in your home, typically 20% or more, you can refinance and switch to a conventional loan, which allows you to cancel mortgage insurance altogether.
2. Paying a Larger Down Payment
If you can make a down payment of 10% or more when you take out your FHA loan, your annual MIP is only required for 11 years rather than the life of the loan. This is an important consideration if you want to avoid paying MIP for decades.
3. Choosing a Different Loan Type
Before you take out an FHA loan, consider whether a conventional loan might be a better fit. If you have a larger down payment or a higher credit score, a conventional loan might allow you to avoid MIP entirely, saving you money in the long run.
4. Legacy Rule for Loans Before 2013
For FHA loans taken out before June 3, 2013, the rules are a bit different. These loans allow MIP to be canceled once the homeowner’s equity reaches 22%, provided the borrower has made timely payments for at least five years. Unfortunately, this rule doesn’t apply to newer FHA loans, making refinancing a popular option today.
FAQs About FHA Mortgage Insurance
Check out these quick answers to some of your most common questions about FHA MIP to better understand its implications for your home loan.
Can I remove MIP from an FHA loan?
If your FHA loan was taken out before June 3, 2013, MIP can be canceled once you reach 22% equity. Refinancing into a conventional loan is generally the only way to remove MIP for newer loans.
How long does MIP last on FHA loans?
For most FHA loans, MIP must be paid for the life of the loan unless you refinance. However, if you made a down payment of 10% or more, MIP is only required for 11 years.
Do all FHA loans require MIP?
Yes, all FHA loans require an upfront MIP payment and annual MIP. However, you can roll your upfront MIP into your loan amount, allowing you to finance it instead of paying it out of pocket at closing.
How much is FHA MIP per month?
The cost of MIP per month varies depending on your loan amount, loan term, and LTV ratio. Typically, the annual MIP rate is 0.55% of the loan amount, divided into 12 monthly payments.
Is MIP tax-deductible?
MIP was tax-deductible in previous years, but it isn’t anymore. However, tax laws regarding the deductibility of MIP may change. Be sure to consult a tax professional for the latest information.
Are you eligible for a FHA home loan?
Talk to one of our loan experts to see if you qualify.
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