What is FHA Mortgage Insurance?
How Does it Work?
Mortgage Insurance remains a hot topic for potential Borrowers, current Borrowers, and professionals alike. And of great interest, no matter which type of mortgage program it's utilized in ... Conventional or FHA (Federal Housing Administration).
While I've written in the past about Mortgage Insurance as it relates to Conventional financing, I now want to focus on its counterpart within FHA Loans ... which is mandatory, guaranteed, and government issued (not Privately backed by Corporations). (See past posts, "Understanding Private Mortgage Insurance. PMI: The Pros and Cons" and "How to "Replace" Mortgage Insurance")
Since FHA Loans are government insured, it should come as no surprise that the Mortgage Insurance required with their use is also government-issued and regulated. Or that its cost is directly related to the performance (repayment) of Borrowers' FHA Loans.
As a result, over the last 7 to 8 years, there have been many revisions to the cost for FHA Mortgage Insurance. Revisions driven by great losses (foreclosures) suffered throughout the Housing Crisis, especially in the FHA Mutual Mortgage Insurance Guaranty Fund throughout 2008 and 2009.
The costs of Annual/Monthly Mortgage Insurance, as well as their upfront charges, have changed almost as often as the manual scoreboard at the Chicago Cubs' Wrigley Field this year. (Yes, a shameless plug and shout-out for my Cubbies!)
Here's a little insight into FHA's two (2) types of Mortgage Insurance payment ... and how costs are currently figured on each:
1. UPFRONT Mortgage Insurance: As of the writing of this article (9/29/2016), costs are at 1.75% of the Loan Amount. This cost is financeable. In other words, the cost is added to the Base Loan Amount, in most cases.
Example using a Base Loan Amount of $200,000:
$200,000 (Base Loan Amount)
Cost of: $3,500
As a result, the Borrower can increase their Loan Amount to $203,500
2. PAID Monthly Mortgage Insurance Premium (a/k/a MIP): Most FHA Loans are issued with Loan-to-Values greater than 95% (3.5% Down Payment is typical on Chicagoland-area FHA Loans). In these cases, Borrowers are paying 0.85% X Loan Amount.
Using the same Base Loan Amount as above, the equation for Paid Monthly Mortgage Insurance would be:
$200,000 (Base Loan Amount)
by 12 (months)
Cost of: $144.15/month
As with most Mortgage info and programs, there are a few asterisks or conditions to note and understand:
- If the Borrower makes a Down Payment of more than 5%: Mortgage Insurance costs drop to .80% ... or $135.67/month. (Utilizing the same scenario as above)
- The above rates apply to 30-year term loans
- Costs come down considerably on FHA Loans with 15-year terms
- They also drop when Down Payments of 10% or more are made
- In areas with higher cost housing: FHA Loans greater than $625,500 pay 1.05% on loans with Loan-to-Values above 95%.
As of this writing (9/29/2016): Mortgage Insurance is in place for the entire term of the Loan on ALL 30-year loans with less than 10% Down Payment.
Loans with 10% Down Payment or more will be allowed to eliminate monthly-paid Mortgage Insurance after 11 years. (This has not always been the case. Discussions about this remain ongoing, so stay tuned ... and remain in contact with me for updated info.)
After viewing the above, do you understand why I say that Mortgage Insurance remains a topic of interest ... and perhaps a bit of confusion? The constant changes dictate it so.
So the best advice I can provide, if considering the purchase of a Chicagoland home or the refinance of one where Mortgage Insurance may come into play? Talk to me as soon as you decide you hope to buy.
That way you get the facts as they pertain to your personal financial scenario, your financing options ... and the most current, up-to-date information regarding Mortgage Insurance ...
* Hoping to Buy or Refinance a Home in New Lenox or elsewhere in the Chicagoland area? Contact me! I'll put my 40+ years of Mortgage experience and expertise hard to work on your behalf.
I can be easily found at:
Mortgage Originator - nmls #216987 - IL Lic. 031.0006220 - WI Licensed
American Portfolio Mortgage Corp.
Gene Mundt, Mortgage Originator, an Originator with 40+ years of mortgage experience, will offer you exemplary mortgage service and advice when seeking:
Conventional, FHA, VA, Jumbo, USDA, and Portfolio Loans in Chicago
and the greater Chicagoland region, including:
The Lincoln-Way Area, Will County, (New Lenox, Frankfort, Mokena,
Manhattan, Joliet, Shorewood, Crest Hill, Plainfield, Bolingbrook,
Romeoville, Naperville, etc.), DuPage County, the City of Chicago,
Cook County, and elsewhere within IL & WI.
Referrals are Appreciated and Welcomed!