For many homebuyers, an FHA loan is the way to go. The Federal Housing Administration (FHA) offers a practical path to homeownership with affordable loan programs. With their loan product, they offer lower down payment requirements and more flexible credit qualifications, making it easier to get into a home and out of the renting game. When it comes to signing at the closing table, there is one key factor that you will find on your Closing Disclosure (CD). FHA loans require mortgage insurance, which includes the Upfront Mortgage Insurance Premium (UFMIP) and the Mortgage Insurance Premium (MIP). 

Understanding how these fees work can help borrowers make informed financial decisions, which is one of our many goals at X2 Mortgage. Whether you’re purchasing a home for the first time or refinancing an existing mortgage, UFMIP and MIP are terms you will need to know. In this guide, we’ll break down the costs, how they impact monthly payments, and whether FHA loans are the right fit for you. 

What Is the FHA Funding Fee (UFMIP)?

The Upfront Mortgage Insurance Premium (UFMIP) is a one-time fee required on all FHA loans. This cost helps fund the Federal Housing Administration's ability to insure mortgages, reducing risk for lenders and making homeownership more accessible for borrowers across the country. This is different from Fannie or Freddie conventional mortgage insurance, so read on. 

Key Features of UFMIP:

- Standard Rate: As of 2024, a 1.75% of the loan amount will appear on your closing document. 

- Fee is sent to HUD (U.S. Department of Housing and Urban Development) to the MMI fund. This fund is created for lenders in case FHA borrowers default on their loans, and helps lenders offer financing with less restrictive qualifications.

- One-Time Payment: No need to worry, this fee is only required at closing and typically rolled into the total loan balance rather than paid out-of-pocket. Depending on your situation, if you would like to pay this upfront, you may, as it will reduce your overall loan cost, or APR.

- Refunds Available: Borrowers refinancing into another FHA loan within three years may be eligible for a partial refund.

 

How UFMIP Works in Real Numbers

Let's break it down in an example: Let’s say a borrower is purchasing a home with a $300,000 loan amount using a FHA loan product:

One would take 1.75% of $300,000=$5,250 

So, 1.75% UFMIP = $5,250

As stated above, this amount is typically financed into the loan, bringing the total loan amount to $305,250.

 

How UFMIP Works in a Refinance

When refinancing an existing mortgage with an FHA loan, borrowers must still pay the Upfront Mortgage Insurance Premium (UFMIP). However, FHA wants to give back a small perk to their borrowers: borrowers may be eligible for a partial refund of the previously paid UFMIP if it’s within a certain time frame.

Let’s break it down with an example:

A borrower is refinancing a $250,000 loan into a new FHA loan, to get a better interest rate, they are still charged the rate of 1.75%. 

If you take 1.75% of $250,000 = $4,375 (new UFMIP charge).

So, if the borrower is refinancing within three years of their original FHA loan, they may receive a partial refund of their previous UFMIP, which is applied toward the new UFMIP cost. 

The refund amount decreases each month after the original loan closing, so the longer a borrower waits to refinance, the smaller the refund will be.

This is why timing matters when refinancing an FHA loan—strategic refinancing with an X2 Mortgage loan officer can help reduce upfront costs and improve long-term savings, which is the goal on our first phone call with you.

Finally, it's important to state that while UFMIP is a one time upfront cost, it does not impact monthly payments the same way that the ongoing Mortgage Insurance Premium (MIP) does.

 

What Is the FHA Mortgage Insurance Premium (MIP)?

The Mortgage Insurance Premium (MIP) is a recurring insurance charge paid by FHA borrowers. Unlike UFMIP, which is a one-time cost, MIP is an ongoing expense that is added to the monthly mortgage payment.

MIP Breakdown:

There is an annual interest rate that ranges from 0.15% to 0.75% of the loan balance, depending on loan terms and down payment. This rate is paid annually, and then divided by 12 to be paid as part of the mortgage, making it an ongoing cost that will appear on your monthly mortgage statement.  Your MIP payment can last for 11 years or the entire loan term, depending on the down payment percentage.

Please see below for a down payment and MIP annual rate break down: 

MIP Rates by Loan Term and Down Payment

Loan Term    Down Payment    MIP Rate (Annual)    Duration

30 Years         Less than 5%         0.55%                          Life of loan

30 Years         5% or more           0.50%                          11 Years

15 Years         Less than 10%       0.40%                          Life of loan

15 Years         10% or more         0.15%                          11 Years

 

 

How MIP Affects Monthly Payments

Using the $300,000 loan example, if the borrower puts down the 3.5% ($10,500):

The annual MIP rate is 0.55% (for a 30-year loan with <5% down).

Monthly MIP cost = ($300,000 x 0.55%) ÷ 12 = $137.50 per month.

This cost continues for the entire loan term, unless refinanced or paid off early.

 

When Does MIP End?

Unlike conventional loans where mortgage insurance can be removed at 20% equity, FHA rules are more restrictive.

If the down payment is 10% or higher, MIP automatically cancels after 11 years.

If the down payment is less than 10%, MIP lasts for the entire loan term.

 

Why FHA Requires Mortgage Insurance

Every loan program is based on risk. We often ask our borrowers, if you were lending your money out, wouldn’t you also assess risk on the person borrowing from you, making sure you were more likely to get your money back?

FHA loans are designed for buyers who may not qualify for conventional financing due to lower credit scores or limited down payments.  So, because these loans carry higher lender risk, mortgage insurance helps protect the FHA against losses in case of borrower default.

Unlike conventional loans, where private mortgage insurance (PMI) can be removed after reaching 20% equity (you pay down 20% of your loan), FHA loans typically require MIP for the full term unless refinanced. You can refinance into a conventional product to knock off your MIP and get a better interest rate. 

To qualify, you must meet certain qualifications: 

Credit score of 620

DTI (debt to income) ratio to 45% or less. 

An LTV of 97% (this means you paid down 3% of your loan)

If you think you may be close to this situation, please call one of our X2 Mortgage professionals, as you will very likely save on your mortgage every month. The best part? If the home's value has appreciated significantly, meaning the home's value went up, the borrower may qualify to refinance into a conventional mortgage with no PMI, saving hundreds of dollars per month.

 

Comparing FHA Mortgage Insurance to Conventional PMI

FHA loans can still be competitive and a great option for those that can only put down a low down payment amount, but still have credit scores above 620. For borrowers with strong credit and a low DTI ratio, a conventional loan is usually a better option. Let's compare the differences side by side, so you can start to create home ownership goals for yourself. 

 

FHA Mortgage Insurance vs. Conventional PMI: Key Differences

When comparing FHA mortgage insurance to private mortgage insurance (PMI) on conventional loans, there are a few major differences that borrowers should consider.

Upfront Cost – FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which is 1.75% of the loan amount, paid at closing or financed into the loan. In contrast, conventional loans do not require an upfront mortgage insurance fee.

Monthly Mortgage Insurance – FHA borrowers pay a Monthly Mortgage Insurance Premium (MIP), which typically ranges from 0.15% to 0.75% of the loan balance annually. Conventional loans with private mortgage insurance (PMI) have monthly costs that vary between 0.1% and 2% of the loan balance, depending on the borrower's credit score, down payment, and loan terms.

Can Mortgage Insurance Be Removed? – With FHA loans, MIP can only be removed after 11 years if the borrower puts 10% or more down at the time of purchase. If the down payment is less than 10%, MIP stays in place for the entire loan term unless refinanced. With conventional loans, PMI is automatically removed once the borrower reaches 20% equity in their home, making it a more flexible option for those looking to eliminate mortgage insurance costs over time.

Who Benefits Most? – FHA loans with mortgage insurance are best suited for borrowers with lower credit scores or those who need a low down payment option (as low as 3.5%). Conventional loans with PMI are often a better choice for borrowers with higher credit scores and larger down payments, as they can qualify for lower monthly costs and have the option to remove PMI once they reach 20% equity.

 

Understanding these differences can help borrowers choose the best loan type for their financial situation. However, don't stop here. Your X2 mortgage loan officer can give you options for many different kinds of loan programs. We understand that life happens, and like the FHA, we simply want everyone to have access to homeownership. 

 

 

Other Closing Costs On an FHA Loan

When closing on an FHA loan, borrowers should expect to pay additional costs beyond UFMIP. These closing costs typically range from 2% to 6% of the loan amount and include:

Down Payment – FHA loans require a down payment for each loan, and the amount depends on the credit score. For borrowers with a credit score of 580 or higher, they will need a minimum 3.5% down payment. Those with credit scores between 500 and 579 may still qualify, but must put down at least 10%.

Lender Fees – Many banks and other lenders include lots of fees: underwriting fees, application fees, processing fees, and document preparation costs. Here at X2 mortgage, we do not charge any of these fees, saving you potentially thousands of dollars. 

Third-Party Fees – On your closing documents (CD) you will see services like appraisals, credit reports, title insurance, notary services, and recording fees add to the total cost. These fees usually come from your city and title companies. You will get an exact balance of what these fees are on your CD, three days before you close on your loan. 

Prepaid Expenses – On your CD, you may need to pay property taxes, homeowners insurance, and accrued interest upfront to establish their escrow account.

It’s important to plan for these costs when budgeting for an FHA loan. Some of them can be negotiated with the seller through seller concessions and other down payment assistance programs.

 

Pros and Cons of FHA Loans 

Pros:

✔ Lower down payment options (3.5%).

✔ More lenient credit score requirements.

✔ Fixed mortgage insurance rates, regardless of credit score.

Cons:

✖ UFMIP adds to total loan balance.

✖ MIP lasts for the entire loan unless refinanced.

✖ Higher long-term cost compared to PMI on a conventional loan.

 

Who Should Consider an FHA Loan?

An FHA loan with UFMIP and MIP may be a smart choice for borrowers who:

Have a credit score below 620, making conventional PMI expensive.

Need a low down payment option with more flexible qualification standards.

Plan to refinance into a conventional loan once equity increases.

However, if a borrower has strong credit and can afford a larger down payment, a conventional loan may offer lower total costs in the long run.

 

Final Thoughts: Understanding the True Cost of FHA Mortgage Insurance

FHA loans make homeownership possible for many buyers who might otherwise struggle to qualify for a mortgage. While the long-term cost of UFMIP and MIP should be carefully considered, along with other costs associated with this loan, we still think this is a fantastic loan product.

For some, the security of getting a loan at all outweighs the added costs, especially if they plan to refinance later. For others, waiting to qualify for a conventional loan with no PMI may be the better move. It depends on your situation. 

However, we always say, the best time to buy a house was yesterday. This is because of asset appreciation, also known as equity. 

As always, working with a knowledgeable mortgage broker at X2 mortgage can help you navigate the best options for your unique financial situation. Call us today if you have any questions!