How to Calculate FHA Monthly Mortgage Insurance
FHA loans are government-backed mortgages that provide approved lenders with mortgage insurance. In exchange for this protection against loss from loan default, these lenders agree to underwrite their loans using the more lenient guidelines of the FHA. FHA guidelines support the intended purpose of the FHA mortgage loan --- to provide access to safe, affordable housing to low- and moderate-income Americans. All FHA borrowers pay some form of mortgage insurance.
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Types
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There are two types of mortgage insurance associated with FHA loans---upfront mortgage insurance and annual mortgage insurance. Upfront mortgage insurance is a percentage of the loan amount paid at closing on behalf of the borrower. As of Oct. 4, 2010, that percentage is 1 percent. UFMIP can also be added to the loan amount and financed, instead of paid in full at closing.
Annual MIP Rates
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Annual mortgage insurance is a percentage of the loan amount that is prorated monthly. The borrower pays this as part of the mortgage payment. The current annual MIP, as of Oct. 4, 2010, varies according to the loan term and the down payment percentage. For a 30-year mortgage with the minimum 3.5 percent down payment, the annual MIP is 0.9 percent. Borrowers who put 5 percent or more down on a 30-year mortgage pay 0.85 percent in annual MIP. There is no annual MIP for borrowers who put 10 percent or more down on a 15-year mortgage, but those who put less than 10 percent down pay 0.25 percent.
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Shortcut Method
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Lenders traditionally calculate monthly MIP for qualification purposes using a shortcut formula. Multiply the loan amount times the appropriate annual MIP rate for the loan type. Take this number and divide by 12 to get your monthly MIP. For example, if the loan amount were $200,000 for a 30-year loan with the minimum amount down of 3.5 percent, the annual MIP would be $1,800. That would make the monthly MIP $150.
Official Method
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In actuality, the exact formula the FHA uses is a bit more complicated. The average annual loan balance minus the financed UFMIP is used instead of the loan amount, which is then multiplied by the annual MIP rate and divided by 12. Since the loan balance shrinks each month due to payment toward the principal, the annual MIP shrinks each year as well. An amortization table, which splits monthly mortgage payments out into their interest and principal portions, can be used to determine the annual average balance for a given year.
Cancellation of MIP
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There is automatic cancellation of annual MIP payments for FHA loans closed after Jan. 1, 2001. Once a borrower has paid on a 30-year loan for five years, his annual MIP is cancellable when the loan balance reaches 78 percent of the original loan amount. Loans with terms of 15 years do not have this five-year waiting period and are cancellable when the balance reaches 78 percent of the original loan amount, regardless of when that occurs.
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