How Much Does PMI Usually Cost With an FHA Loan?

The Federal Housing Administration (FHA) guarantees mortgages against default, making lenders more likely to issue the loans to people who can afford only small down payments, which can be as little as 3.5 percent. The FHA prohibits lenders from charging for private mortgage insurance (PMI), which guarantees a loan against default, on FHA mortgages, but imposes its own government mortgage insurance premiums.

Upfront Premium

All FHA mortgages require an upfront mortgage insurance premium payment of 1 percent, which was lowered from 2.25 percent in October 2010. For example, if you took out a $163,000 mortgage, you would have to pay an upfront fee of $1,630. However, the FHA permits you to roll this fee into the mortgage, if desired.

Monthly Premiums

The monthly premiums for FHA mortgages vary depending on the size of your down payment and the term of the mortgage. For FHA mortgages longer than 15 years, the annual rate is 0.85 percent, if the down payment is greater than 5 percent, and 0.9 percent of the down payment is 5 percent or smaller. For 15-year or shorter mortgages, the rate equals 0.25 percent if the down payment is 10 percent or less. For down payments greater than 10 percent on 15 year mortgages, the FHA requires no monthly insurance premiums.

Time Frame

If your loan requires monthly mortgage insurance premiums, you must continue paying them for at least five years, regardless of how quickly you pay down the mortgage. After the five years have passed, the monthly payments will be canceled once your loan-to-value (LTV) ratio falls below 78 percent, according to the U.S. Department of Housing and Urban Development (HUD). Calculate your LTV ratio by dividing your outstanding mortgage balance by your home's value. For example, if you had a mortgage of $150,000 and a home value of $200,000, you would divide $150,000 by $200,000 to find that you would have an LTV of 0.75, or 75 percent.

Function

The FHA collects the mortgage insurance premiums to offset the costs of guaranteeing the mortgages. When someone defaults on an FHA-backed mortgage, the FHA must reimburse the lender for any losses incurred.

Potential

On April 18, 2011, the FHA annual mortgage insurance premium is scheduled to increase 25 basis points. That means those with a loan of more than 15 years who put 5 percent or less down will pay 1.15 percent. Those who put more than 5 percent down on the same loan term will pay 1.1 percent. For loans whose terms are 15 years or less, the respective amounts will be 0.5 percent and 0.25 percent.

References

• Bankrate; What to Know About FHA Loans; Marcie Geffner; June 2008
• U.S. Department of Housing and Urban Development; Mortgagee Letter 2010-28; September 2010
• U.S. Department of Housing and Urban Development: Mortgage Insurance Premiums
• Bankrate: No PMI With FHA Mortgages; Don Taylor; October 2008
• Seattle Condos and Lofts; FHA Mortgage Insurance Premium Increases; March 2011