How to Calculate Mortgage Insurance on an FHA Loan

When applying for a Federal Housing Administration (FHA) loan, one of the key components of the cost is mortgage insurance. This insurance protects the lender in case the borrower defaults on the loan. Calculating FHA mortgage insurance involves understanding several factors including the upfront mortgage insurance premium (UFMIP) and the annual mortgage insurance premium (MIP). Here’s a detailed guide on how to calculate these costs.

1. Upfront Mortgage Insurance Premium (UFMIP):

The UFMIP is a one-time premium paid at closing, which is typically 1.75% of the loan amount. This fee can be paid in cash or rolled into the loan balance.

Calculation:

• Determine the loan amount: Let’s say you are taking out an FHA loan of $250,000.
• Calculate the UFMIP: Multiply the loan amount by 1.75% (or 0.0175).

Example Calculation: $250,000 × 0.0175 = $4,375

So, the UFMIP for a $250,000 loan would be $4,375.

2. Annual Mortgage Insurance Premium (MIP):

The MIP is an ongoing monthly fee that is included in your mortgage payment. The rate varies depending on the term of the loan, the loan amount, and the loan-to-value (LTV) ratio. For most FHA loans, the MIP rate is 0.85% for a 30-year loan with an LTV ratio greater than 95%. This rate may differ based on specific conditions.

Calculation:

• Determine the loan amount: Continuing with our example of a $250,000 loan.
• Determine the annual MIP rate: Assume a rate of 0.85% (or 0.0085).
• Calculate the annual MIP: Multiply the loan amount by the MIP rate.

Example Calculation: $250,000 × 0.0085 = $2,125

This amount is the annual MIP. To find the monthly MIP, divide this figure by 12.

Example Calculation: $2,125 ÷ 12 = $177.08

So, the monthly MIP for a $250,000 loan with an annual rate of 0.85% would be approximately $177.08.

3. Total Monthly Mortgage Payment Including MIP:

To understand the total monthly mortgage payment, you need to add the monthly MIP to your regular mortgage payment, which includes principal and interest. Here’s how to estimate your total monthly payment.

• Calculate the principal and interest payment: This requires the loan amount, interest rate, and term of the loan. Use a mortgage calculator or amortization formula to determine this.
• Add the monthly MIP to the principal and interest payment.

Example Calculation: Assuming a 30-year fixed FHA loan at 4% interest, the principal and interest payment for a $250,000 loan would be approximately $1,193.54.

Total Monthly Payment: $1,193.54 (principal and interest) + $177.08 (monthly MIP) = $1,370.62

Summary:

1. Upfront Mortgage Insurance Premium (UFMIP):
For a $250,000 loan, UFMIP is $4,375, which can be paid upfront or rolled into the loan.

2. Annual Mortgage Insurance Premium (MIP):
For the same loan, the annual MIP is $2,125, or approximately $177.08 per month.

3. Total Monthly Mortgage Payment:
Combining the principal, interest, and MIP results in a total monthly payment of $1,370.62.

Understanding how to calculate FHA mortgage insurance can help you better plan for your home purchase and budget effectively. Always check with your lender for the most accurate and specific figures based on your loan terms.