Borrowers with a subprime mortgage who are refinancing to a FHA mortgage are often not aware of the upfront mortgage insurance premium (MIP). As the name implies, this is paid upfront at the time of close. During the subprime heyday MIP was one of the reasons not to do a FHA mortgage. How the tables have turned.
FHA under the 203b, 234(c), & 203k programs charges an upfront MIP equal to 1.5% of the loan amount. If you end up selling the home or refinancing the loan within the first 84 months (7 years) you are entitled to a refund of the balance (CORRECTION: as of 12/04 this refund is no longer available – see comments below). MIP can be wrapped into your loan, but you have the option to make a cash payment at close as well.
If you are putting less than 10% down then FHA also charges a monthly mortgage insurance equal to 0.5% of the loan amount. You must pay this even if your home appreciates to the point where your loan balance is less than 80% of the value of the home. FHA will not allow you to cancel.
So, on a $200,000 mortgage here is what your fees look like:
- Upfront Mortgage Insurance Premium (MIP) = $3,000
- Monthly Mortgage Insurance = $83.33
Subprime lenders used these two FHA features as a major selling point for their loans and so a lot of folks in the industry have forgotten how it works. As a borrower these are things you need to be aware of as you consider refinancing your subprime mortgage into a FHA mortgage.
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on Oct 14th, 2007 at 6:00 am
Good job explaining the Sub Prime vs FHA. I didn’t know about the 10% down part, thanks
It cracks me up, during the don’t ask any questions and I won’t tell any lies period of mortgage lending.
An 80/20 loan.
If you have a first mortgage at 6.5% and a second at 10% and you can’t figure out where the MI is, call me I have swamp land in Florida for sale,
Don’t you just love the mortgage people that don’t qualify to do FHA loans.
FHA Qualified Mortgage Brokers
$250,000 Net Worth (20% liquid)
A Written Quality Control Plan (them b@st#rd$, imagine expecting a minimum level of quality)
You Must Go Through An Annual Audit Of Your FHA Files
Hmmm, sounds like even if I am doing an conventional loan I should use an FHA qualified lender anyway.
Even their name Sub Prime ugh.
on Oct 15th, 2007 at 11:50 am
A few years ago when the bond ratings agencies were still showing the subprime pools to be less risky for bond investors than they really are, subprime teaser rates were so low that FHA mortgage insurance did indeed make the payment higher than subprime. Now that the market has “corrected” subprime interest rates higher, FHA loans are a good deal. The base rate is so much lower than subprime that adding a little mortgage insurance (still less than required on conventional Fannie Mae loans) doesn’t take the payment as high as subprime loans do.
on Oct 15th, 2007 at 8:58 pm
Carl,
Very good point. Thanks for stopping by.
on Oct 17th, 2007 at 3:00 pm
yep I do a lot of FHA loans, and now many borrowers are aware of the FHA mip refund
on Oct 19th, 2007 at 9:39 am
[...] more than 10% down, then you do not need to pay the monthly mortgage insurance. I have addressed MIP and MI in more detail elsewhere so I will not go into more details [...]
on Nov 2nd, 2007 at 1:46 am
HUD no longer issues refunds for loans made since December 2004… check out HUD’s Mortgagee Letter 2005-03. In other words you’ll never see any of that upfront premium.
on Nov 2nd, 2007 at 10:59 am
Mike P,
Thanks for pointing out the refund is no longer available.
on Jul 13th, 2008 at 5:18 pm
[...] the Upfront Mortgage Insurance Premium (UFMIP)and monthly Mortgage Insurance IMI) will now be risk based. Even though the borrower has the option [...]
on Jan 28th, 2009 at 9:25 am
This is very useful.I did not know what it was until i started to get my monthly statements.I am educating myself thru this site.
Purna.
on Apr 27th, 2009 at 4:00 pm
I am now educated for my refi this week, that FHA is charging $2660 on a 132K loan, At least I’m going from %7.25 to %5.0 .
I was in “sticker shock” for a little while !
Thanks for the info.
on Jun 30th, 2009 at 6:25 pm
This blog post is a good example of why consumers need to be very careful where they get the information they are “educating” themselves with. As Mike P mentioned refunds of UMIP have not existed since 12/04, this post was written in 2007 so it was incorrect from the get go. 2 the umip is now 1.75% and the monthly MI is .55%
Mr. Shailesh Ghimire you may want to make some revisions to this because this post ranks extremely high in Google and who knows how many people have been mis-informed in the last 3 years…
on Aug 12th, 2009 at 6:15 pm
I am a first buyer and Got $387,362.00
there is an item in my settelment estimate as follow:
FHA Upfront “My mortage company name” 6,662.25
My calculation doesn’t mach neither of %1.5 or 1.75%
Also in this article you said if borrower refinancing…, I am not refinancing. I am buying a properties and applied for FHA loan. Does it apply to me tot?
Please advise.
on Aug 25th, 2009 at 4:26 pm
what was your purchase price?
on Jan 28th, 2010 at 10:32 am
My financing institute added MIP amout of 4,331.25 to my loan amount and they also added same figure in closing cost. It looks like they charged MIP twice. Is that the regular practice or I got screwed up? Your answer will be highly appreciated.