What Is the FHA Mortgage Insurance Premium?
The Federal Housing Administration (FHA) provides guarantees to mortgage issuers that a mortgage will be paid off if a homeowner defaults on a mortgage. Homeowners with FHA-insured mortgages pay a premium, or fee, to help cover the cost of insuring the mortgage.
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Function
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The FHA mortgage program allows someone to obtain a home mortgage with as little as 3.5 percent of the purchase price as a down payment. To facilitate the low down payment, the FHA requires the purchase of mortgage insurance by the borrower.
Benefits
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Mortgage insurance is not for the benefit of the homeowner. The insurance will pay off any losses to the mortgage company if it has to repossess the home and resell it.
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Premium Amount
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As of 2009, the FHA mortgage insurance premium is an upfront 1.75 percent charge when the loan is originated and an ongoing 0.5 percent annual premium of the mortgage balance.
Considerations
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The upfront insurance premium can be added to the mortgage balance. It does not increase the minimum down payment amount. The annual insurance premium that is added to the monthly payment will be canceled when the loan balance declines to less than 78 percent of the house value.
Warning
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For 2010, the FHA has applied to Congress to increase the upfront mortgage insurance premium to 2.25 percent and the annual premium to 0.55 percent. FHA mortgage insurance premiums can add significantly to a monthly mortgage payment.
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