All insurance is priced relative to the risk of a specific event. In the case of mortgage insurance, the costs rise with the risk of nonpayment, or default on a loan. FHA mortgage insurance costs vary with the amount of home equity a borrower has, as well as the terms of the loan.
FHA Annual Mortgage Insurance Premiums
The premiums borrowers pay changed most recently in April 2011.
- 15-years or less – A mortgage with a loan term of 15 years or less is charged based on the down payment. If the down payment is greater than 10%, there are no mortgage insurance premiums to be paid. A down payment of less than 10% would require annual premiums of .5% of the home value.
- More than 15-years – Loans with a term of greater than 15 years have larger insurance costs. A mortgage issued with a down payment of less than 10% but more than 5% is charged 1.1%. A down payment of less than 5% would require an annual premium of 1.15%.
Upfront FHA Insurance Premiums
The upfront insurance premiums due for FHA mortgages have also been reduced. The upfront mortgage premium is 1% after being reduced from 1.5%.
Keyword Quick Tip! The “Loan-to-Value” (LTV) calculation is the size the loan compared to the value of the home. An $80,000 mortgage on a $100,000 home would have a “loan to value” ratio of .8, or 80%.
- Mortgages with a terms of 15 years or less and with a Loan to Value ratio of 90% or more will have their premiums canceled when the LTV falls to 78%. This drop occurs automatically, without consideration for how long the borrower paid routine insurance premiums.
- Mortgages with terms of 15 years or less and LTV ratios of 89.99% or less will not incur any upfront mortgage premiums.
- Mortgages with terms longer than 15 years will have insurance premiums canceled after the loan to value ratio falls to 78%. The borrower is required to have paid for FHA mortgage insurance for at least 5 years to qualify for an automatic cancellation of premiums.
We created the following chart to make the above requirements easier to understand. Simply match your loan term with a loan to value ratio to find your upfront FHA mortgage insurance premium:
FHA Insurance Premiums Matter
The insurance premiums you pay on your loan greatly affect the true cost of financing. As you can see, there are many benefits to a shorter, 15-year loan compared to a 30-year loan. In particular, a 15-year mortgage has a much lower insurance premium, and a down payment of 10% or more can eradicate the requirement to pay an upfront mortgage premium.
These costs should always be included in the calculus for purchasing decisions. Any homebuyer should compare and contrast multiple options, down payment sizes, and mortgage offers before making a selection. In some cases, FHA mortgage insurance premiums are preferable to a long wait while a future homeowner builds their down payment. In other cases, future homebuyers may be better positioned to wait to buy a home before saving a larger down payment to qualify for lower annual mortgage insurance premiums from the FHA.
