Mortgage Insurance Premium Rates
FHA Mortgage Insurance Premium (MIP) rates have changed drastically for the year 2015. This is in large part due to the fact that the insurance reserves are reaching its highest expected total this year, enabling the FHA to pass the savings onto homebuyers, making home ownership a higher likelihood for many people. The high reserves are due to better performance on loan payments and the housing market, making it possible for insurance rates to come down. The rates seen today are the lowest they have been in the last few years, making FHA loans a great option for homebuyers.
FHA programs began back in 1934, when something needed to be done to stop the predatory lending that was occurring, causing potential homebuyers to put down as much as 50% on the home they were purchasing in combination with paying exceptionally high-interest rates. The FHA was formed and FHA loans became a reality. The only caveat that the FHA had for lenders was that they had to only fund “good loans.” These are the loans that the banks were sure the owners would not default on. If the banks did their part in providing only solid loans, the FHA would insure every loan that the bank offered through the FHA program. This made it possible for banks to provide more loans with less risk to their own profits.
FHA MIP rates were low for many years, but in 2008, they were forced to increase rather quickly and continue to do so at least five times afterward. This was in an effort to replenish the reserves that were lost due to the high number of risky loans that were being offered. The FHA had to dole out much more money than ever before in order to make good on their guarantee. This expense was then passed on to future FHA borrowers as they were then required to pay higher MIP rates in order to help the FHA replenish their reserves. This went on until 2013, when the FHA had to draw money from the US Treasury in order to stay afloat. Since then, however, thanks to stricter guidelines and better lending practices, the FHA has gotten back on its feet and has been able to lower the MIP rates once again.
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This History of MIP
The FHA MIP rates have changed drastically throughout the years. Before the crisis happened in 2008, rates were fairly reasonable….upfront MIP was just 1.5% and annual MIP was 0.55%. After October of 2008, however, the rates increased as follows:
- October 2008 – Upfront mortgage insurance increased to 1.75%
- April 2010 – Upfront mortgage insurance increased to 2.25%
- October 2010 – Upfront mortgage insurance decreased to 1.0% but annual MIP increased to 0.9%
- April 2011 – Annual mortgage insurance increased to 1.15%
- April 2012 – Upfront mortgage insurance increased to 1.75% and annual mortgage insurance increased to 1.25%
- April 2013 – Annual MIP increased to 1.35%
- January 2015 – Annual MIP decreased to 0.85%
As the FHA increased the PMI either upfront or annual, the other insurance was altered so as to adjust the total amount of money that MIP would cost borrowers.
What is Upfront Mortgage Insurance
Upfront mortgage insurance is the fees that you pay at the closing of your loan. Right now that rate is 1.75% of the loan amount. This amount can be paid in cash at the closing, along with your closing costs or you have the option to roll it into your loan. Upfront mortgage insurance costs do not count against your loan-to-value ratio, which makes it easy to roll the cost into the loan. On a $250,000 the upfront mortgage insurance is $4,375, which could be a lot of money to come up with in addition to closing costs and the 3.5% down payment that is required on FHA loans. The addition of this cost to the loan will make your LTV closer to 98% rather than 97.5% as was originally determined.
Annual Mortgage Insurance
The FHA MIP rates for annual mortgage insurance dropped for the first time in many years at the start of 2015. The new rate is 0.85%, dropping 50 basis points from its previous 1.35%. This served as a significant savings for homebuyers as the difference in that monthly payment made it more affordable for more people to use FHA financing. The annual MIP is paid on a monthly basis, although it is configured annually.
For example…on a $250,000 loan, the annual MIP would be $2,125. But that amount is divided amongst the 12 months. This means that $177 would be added to each of your mortgage payments in order to meet the MIP payments every month. Just last year, that same mortgage amount would have amounted in annual mortgage insurance of $3,375 with that adding $281 to each monthly mortgage payment. This was just enough to set the debt ratio of many borrowers too high to qualify for a loan.
If you are taking advantage of the ability to streamline refinance your FHA loan, you might be eligible for an upfront MIP refund, which will help you to have money towards your refinance. The amount you receive and the FHA MIP rates you receive moving forward will depend on when your original FHA loan originated. If you obtained the loan prior to June 1, 2009, you are in the 1st category; if you closed after that date, you are in the 2nd category.
- If you are in the 1st category, your new FHA MIP rates are: .01% upfront mortgage insurance and .55% annually.
- If you are in the 2nd category, your new FHA MIP rates are: 1.75% upfront and 0.85% annually.
These MIP rates pertain to loans where the amount of the down payment is less than 5% (which is all that the FHA requires with their 3.5% minimum down payment). Any loans below 95% LTV will have an annual MIP rate of 0.80%.
The exception to this rule is those loans that are above $625,500. These loans are in their own category and will pay as follows:
- Less than 95% LTV pays an annual mortgage insurance rate of 1%
- More than 95% LTV pays an annual mortgage insurance rate of 1.05%
Last but not least, are the 15-year loans, which also carry different MIP rates:
- Less than a 90% LTV with a loan amount less than $625,000 pays annual mortgage insurance of 0.45%
- Greater than a 90% LTV with a loan amount less than $625,000 pays annual mortgage insurance of 0.70%
- Less than a 78% LTV with a loan amount greater than $625,000 pays annual mortgage insurance of 0.45%
- Less than a 90% LTV but greater than 78% LTV with a loan amount greater than $625,000 pays annual mortgage insurance of 0.70%
- Greater than a 90% LTV with a loan amount greater than $625,000 pays annual mortgage insurance of 0.95%
In addition to the varying FHA MIP rates are the chances to obtain an MIP refund if you are using the streamline FHA refinance. If you obtained your loan within the last 3 years, you will be eligible for a prorated refund of your upfront mortgage insurance which can be used toward your new upfront mortgage insurance charges. The MIP refund is available for those that have had their loan for 6 months and made timely payments. In general, a total of 210 days must have passed since you obtained the loan in order to be eligible.
The refunds start at 70% on your sixth month of owning the loan and go down 2% for each month that passes after that point. For example, on your 12th month of having the original FHA loan, you will get a 58% refund on your upfront MIP. On the last month, which is the 36thmonth, you will receive a 10% refund of the mortgage insurance.
FHA MIP is typically required for the life of the loan, but there is one exception. If you put down at least 10% on the purchase of the home, you will only be required to pay the FHA MIP rates for 11 years as that is when you will hit 78% LTV and will be excused from paying the mortgage insurance on a monthly basis. If you are refinancing and are trying to get rid of mortgage insurance, you will need to pay for a new appraisal to be done, as the original appraisal is what is used to determine the value of the home on a streamline refinance.
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