A Mortgage Insurance Premium, or MIP, is a required cost for homeowners with FHA home loans. An FHA loan is a government-backed home loan that is insured by the Federal Housing Administration and allows homebuyers to qualify with less-restrictive qualifications, such as lower down-payment options and credit score requirements. An FHA loan is often a solid option for first-time homebuyers or those with less-than-perfect credit.
When financing a home with an FHA loan, a borrower must pay:
- Upfront MIP: This cost is paid at closing.
- Annual MIP: This cost is paid yearly and is broken up into monthly payments as part of your mortgage payment.
*Note that the FHA is reducing the cost of the annual MIP, not upfront. To learn more about the FHA’s MIP reduction on February 22, 2023, click below.
When it comes to determining a borrower’s annual MIP cost, there are a few variables considered:
- Loan-to-value ratio (LTV)
- Total loan amount
- Length of mortgage term
Unlike Private Mortgage Insurance (PMI), you cannot cancel MIP once you reach a certain home equity percentage. If your down-payment is at least 10%, you will pay MIP for 11 years. If your down-payment is less, you will pay MIP for the entire life of the loan. While there’s no way to completely avoid paying MIP when using an FHA loan, you can lower what you pay by putting at least 10% down or refinance to a conventional loan once you reach 20% equity.
So whether you choose to wait and save or decide now is the right time to buy, you have many options when it comes to financing your first home. For many homebuyers, mortgage insurance is an opportunity to purchase their dream home and begin building equity on their own property sooner rather than later!
If you’re ready to start exploring your financing options, book a virtual appointment and speak to a Pulte Mortgage Financing Advisor today!
