Home buyers using FHA financing will pay two types of mortgage insurance premiums (MIP). The FHA uses the acronym MIP instead of PMI -- private mortgage insurance -- as used for other types of mortgages. The functions of MIP and PMI are the same: to protect the lender against losses if the homeowner defaults on the loan.
Determine an initial loan amount. Subtract the down payment amount from the home price. The minimum down payment for an FHA loan is 3.5 percent of the purchase price. To use the minimum down payment, multiply the home price times 96.5 percent for the initial loan amount. For example, on a $200,000 home purchase, the maximum FHA loan amount $193,000.
Calculate the FHA upfront mortgage insurance premium (UFMIP) by multiplying the initial loan amount times 1 percent. On the example loan, the UFMIP would be $1,930. At loan closing, the UFMIP can be paid in cash or rolled into the loan balance. Including the UFMIP in the loan gives a final loan amount of $194,930.
Calculate the annual FHA MIP by multiplying the initial loan amount times the current annual MIP rate. As of May 2011, the last rate increase was in April 2011 and the rate was 1.15 percent for a greater than 95 percent loan-to-value. On the example, $194,930 times 1.15 percent produces an annual MIP of $2,241.70.
Divide the calculated annual MIP by 12 to determine how much the annual MIP will add to the monthly mortgage payment. With the example, the annual MIP amount of $2,241.70 results in a monthly MIP amount of $186.81.
The April 2011 annual MIP rate for loan-to-values less than 95 percent was 1.10 percent. The annual MIP will decrease each year as the loan balance is paid down.
- The April 2011 annual MIP rate for loan-to-values less than 95 percent was 1.10 percent.
- The annual MIP will decrease each year as the loan balance is paid down.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.