FHA Mortgage Insurance: Why It’s Necessary And So Expensive

Debt FHA vs normal loan (self.personalfinance) submitted 2 years ago by Gnome_Saiyan91 Im currently looking at buying a house and the area i live in everything is expensive so saving 20% is going to take awhile even though i make good money.

Unlike your mortgage interest, these premiums are not always tax deductible.1 Mortgage insurance is one of the few types of insurance products that doesn’t underwrite it’s premiums based on individual default risk, rather the size of the borrower’s mortgage and the amount of money put down determine the mortgage insurance quote. So, two individuals-regardless of credit-with the same mortgage amount and down payment can expect to pay about the same PMI premium.

The upfront mortgage insurance requirement is unavoidable, and nearly doubled from 1% to 1.75% back in 2012. And the annual premium can no longer be avoided. Since 2013, many FHA loans now require mortgage insurance for life, making them a lot less attractive and expensive long-term! The never-ending FHA MIP could be the tipping point for some.

Mortgage insurance: With FHA loans, the upfront mortgage insurance premium may increase your loan balance, and monthly FHA premiums can cost more than private mortgage insurance would cost. What’s more, in many cases, it’s impossible to cancel mortgage insurance on FHA loans.

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With most FHA loans, you’ll need to pay for both the up-front mortgage insurance premium (UFMIP) and the annual mortgage insurance premium (MIP). The UFMIP is calculated as a percentage of your loan amount, regardless of the term of the loan or the loan-to-value ratio (LTV).

The MIP and subsequent payments contribute to why FHA loans tend to be more expensive than conventional. Also, unlike the latter, FHA insurance premiums cannot be canceled once 20% of home equity is reached; this is a very expensive and important cost to account for.

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FHA loans require an upfront mortgage insurance premium (UFMIP) of 1.75%, and a monthly mortgage insurance premium (MIP) that ranges from .45% to 1.05% of your loan amount, paid monthly. Mortgage insurance adds an extra expense to your monthly payment, and depending on what type of loan you are taking out, it may or may not be cancellable.

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FHA Mortgage Insurance vs private mortgage insurance (pmi) Another way to cancel your FHA mortgage insurance is to refinance it into a conventional loan. In many cases, this is the most cost.