What Is an Upfront Mortgage Insurance Premium?

Home buyers who want to buy a home with less than the traditional 20 percent down payment are required to pay mortgage insurance to the lender. One way this insurance is charged is as an upfront premium.

Function

The term mortgage insurance premium is used primarily with FHA-insured mortgages. Home buyers financing a house purchase with an FHA loan are required to pay an upfront mortgage insurance premium (MIP). The upfront MIP can be paid in cash by the home buyer or rolled into the mortgage balance.

Calculating MIP

In 2010 the upfront MIP amount for FHA home loans was 2.25 percent of the loan amount. Home buyers can calculate the dollar amount of the upfront mortgage insurance premium by multiplying the home cost minus the planned down payment and multiplying the result by 2.25 percent.

Conventional Mortgage Use

Home buyers financing with conventional--not FHA--mortgages and placing less than 20 percent down are required to purchase private mortgage insurance (PMI). Private mortgage insurance premiums may be charged as either an upfront premium or an annual premium. If PMI is charged upfront, it is usually paid for upfront and not included in the loan amount.

Considerations

A homeowner with an FHA-insured mortgage who refinances the loan with another FHA mortgage can receive a refund of a portion of the upfront MIP to offset the cost of the MIP on the new loan. The refund of MIP is available in the first three years after an FHA loan is originated.

References

• Mortgage News Daily: FHA Increases Upfront MIP Fee
• HUD: FHA Homeowners Fact Sheet