Mortgage insurance premiums (MIPs) are a type of insurance that borrowers pay on Federal Housing Administration (FHA) loans. MIPs are required on all FHA loans with a down payment of less than 20 percent. MIPs are paid in two ways: upfront at closing and annually as part of the borrower’s monthly mortgage payment. The upfront premium is 1.75 percent of the loan amount, and the annual premium is between .45 and 1.05 percent of the loan amount, depending on the length of the loan and the size of the down payment. MIPs help to protect lenders from losses if a borrower defaults on their loan, and they also help to keep FHA-insured loans affordable for borrowers.
How do MIPs work?
Mortgage insurance is typically paid monthly, and the premium is generally included in the borrower’s mortgage payment. The amount of the premium will depend on the type of loan, the size of the down payment, and the term of the loan. Mortgage insurance premiums are typically paid by the borrower until the mortgage balance reaches 78% of the home’s value, at which point the lender will be required to cancel the insurance policy. MIPs help to protect lenders from losses that may occur if a borrower defaults on their mortgage loan, and they also help to make homeownership more accessible by allowing borrowers to purchase a home with a smaller down payment.
What factors affect the cost of MIPs?
Several factors affect the cost of MIPs, including the size of the down payment, the type of loan, and the term of the loan. For example, MIPs are typically much higher for loans with a small down payment or a shorter loan term. In addition, MIPs may be adjusted annually if the borrower refinances or pays down their loan balance. As a result, it’s important to shop around and compare rates before choosing a mortgage lender.
When do you have to pay MIPs?
MIPs are added to the borrower’s monthly mortgage payment. Borrowers with FHA loans must pay MIPs regardless of how much money they have borrowed from the FHA. The amount of the premium depends on the borrower’s loan-to-value ratio and whether they are first-time homebuyers. Borrowers with a loan-to-value ratio of less than or equal to 78% pay an annual MIP of 0.80%. First-time homebuyers also pay a one-time MIP of 1.75% at closing. Borrowers with a loan-to-value ratio of more than 78% pay an annual MIP of 0.85%. Mortgage insurance premiums are paid until the loan balance reaches 78% of the home’s value. At that point, borrowers can either refinance their loan or continue to pay the premium for the life of the loan. Mortgage insurance premiums help to protect lenders from borrowers who default on their loans. For borrowers, MIPs add to the cost of homeownership but allow them to purchase a home with a smaller down payment.
How can you avoid paying MIPs altogether (or reduce your premiums)?One way to avoid paying mortgage insurance premiums (MIP) is to make a larger down payment on your home. If you can put down 20% of the purchase price, you typically won’t have to pay MIP. Another way to avoid paying MIP is to choose a mortgage loan that doesn’t require it. Some lenders offer mortgage products that don’t require borrowers to pay MIP if they meet certain criteria, such as having a good credit score or making a larger down payment. You can also ask your mortgage lender about ways to reduce your MIP. Some lenders offer discounts on MIP for certain borrowers, such as those who agree to take an online financial education course. Finally, remember that you can cancel MIP once you’ve built up enough equity in your home. If you have questions about how to avoid or reduce mortgage insurance premiums, talk to a mortgage lender in Dallas.