Costs of FHA Mortgage Insurance

The Federal Housing Authority’s home buying programs require that a mortgage insurance premium (MIP) of 1.5% of the amount of the loan be paid upon closing. Fortunately, homebuyers can finance the cost of the MIP into their mortgage amount. An additional .50% MIP is added in the PITI (principal, interest, taxes, and insurance) of each monthly payment.  Condominiums do not require the 1.5% up-front MIP, only the monthly .50%.

FHA loans carry a higher mortgage interest premium than conventional loan programs, which only demand MIPs as little as .5% (for those homebuyers putting 10% down), with a renewal rate as little as .3% in subsequent years.

It is a widely-known fact that FHA mortgages help a wide variety of Americans who otherwise would not be able to afford a home to buy one. FHA insured loans are not for everyone, however. Though the down payment and therefore up-front costs are lower on FHA mortgages, the monthly payments might possibly be higher.

There is no clear-cut rule to whether a specific FHA loan would cost you more or less than a conventional loan. Just as with conventional mortgages, different FHA mortgages have different interest rates and different loan terms based on numerous factors, not least of which is your credit. With a conventional loan, your credit is considered jointly with your income.

As FHA loans are designed more for low-to-moderate income households, an applicant’s credit is weighted even heavier. The result of this could potentially be higher interest rates and (with the additional cost of monthly mortgage insurance premiums) higher monthly payments than you could get by coming up with a larger down payment and getting a conventional loan.

Of course, that is not always an option for would-be homebuyers. Fortunately, many of the closing costs associated with FHA mortgages can be financed into the loans. The FHA also helps homebuyers by imposing limits on how much money mortgage companies can charge in certain fees, such as loan origination fees which, according to the restrictions placed upon FHA lenders, cannot be higher than 1% of the total loan amount.

The most striking fact about the cost of FHA mortgage insurance however is its cost to taxpayers, that being nil. FHA mortgage is totally self-funded, with the money paid by borrowers in mortgage insurance premiums going directly into an account which pays for the FHA’s expenses. The bottom line of this is that not only do FHA-insured mortgages and FHA mortgage insurance benefit borrowers and lenders alike, but all hardworking American taxpayers as well.