Do You Have to Pay PMI on an FHA Loan?

by Shauna Zamarripa ; Updated July 27, 2017

PMI stands for Private Mortgage Insurance. This is an additional fee added on to a home buyer's monthly payment that is paid into an escrow account to protect the lender from loss in the event of default. The amount of PMI that is paid is typically 0.5 percent of the total loan amount and is added into the monthly payment for all loans. Knowing the rules for PMI and how they translate in FHA loans is important in determining your overall affordability of a monthly payment.

PMI vs. MIP

PMI is typically only charged with conventional loans. FHA loans have something similar to PMI, which is referred to as MIP or a mortgage insurance premium. Nevertheless, the amount of 0.5 percent is the same when charged to buyers on a home regardless of the term used to describe it.

Upfront Cost

The upfront cost for MIP to buyers at closing is 1.75 percent of the total loan amount. This can be waived if a buyer puts over 20 percent on a property.

Down Payment

FHA loans require a minimum investment of 3.5 percent. With that the MIP will range from 0.5 percent to 0.55 percent. Putting a minimum of 5 percent down on a property will keep the MIP stable at 0.5 percent.

Time Frame

MIP is only charged until the loan principal has been paid down by 22 percent. This would typically take about six years with a 6 percent interest rate, and must be verified by an independent appraisal.

Considerations

When factoring in MIP, and paying the home down by 22 percent this is not just made up of monthly principal payments, but is also determined by the home's year over year appreciation. In states where appreciation is higher for real estate values, MIP premiums can be eliminated in as little as three years.

Expert Insight

If considering making a 20 percent down investment in a property, it might be more financially responsible to consider a conventional loan as opposed to an FHA loan where you might qualify for a lesser interest rate due to down payment. FHA loan interest rates are based completely on market value and can only be lowered if an additional fee is paid to buy the rate down.