Understanding the FHA Upfront Mortgage Insurance Premium (UFMIP)

You’ve probably heard the terms, “FHA loan” or “FHA Refinance.” These types of mortgages are guaranteed by the Federal Housing Administration and provided by an FHA approved lender. They are attractive for a number of reasons, including, the option of making a lower than usual down payment, affordable closing costs, programs for energy efficiency improvements, tax credits, debt consolidation and refinancing.

Borrowers who take out FHA loans must pay a mortgage insurance premium at closing. This premium is referred to as the, “upfront mortgage insurance premium” or UFMIP. The FHA’s latest UFMIP is around 1.75 percent of the loan size. This premium is not paid as cash, but instead added on to the total amount of the home loan. An example of this is that a loan total of $300,000 would result in an UFMIP of actually $305,250, because 1.75 percent of 300,000 is 5,250.

The premium or UFMIP, was labeled accordingly, since it is paid “upfront” by home buyers at closing. Ione time only and goes directly into the Mutual Mortgage Insurance fund. However, it does not affect the loan’s LTV or loan-to-value calculation.

Should a borrower choose to refinance their FHA mortgage within the first 36 months following the closing date, they are entitled to a refund on the unused portion of the MIP. According to Dan Green of The Mortgage Reports, “The refund is based on your original Upfront MIP payment, and decreases by 2 percentage points annually until no money remains to be refunded.”

Here are a Few More Good Things to Know About FHA MIP Refunds:

• Refunds that are obtained on an FHA to FHA refinance are applied to the upfront mortgage insurance premium
• The MIP refunds are accessible for an FHA streamline refinance after the 7-month waiting period is complete.
• Although some FHA streamline refinancing options may not qualify for reduced upfront mortgage insurance premiums, there are still MIP refunds that are available.
• These types of mortgage insurance refunds are obtainable for FHA loans that were initiated less than 3 years ago.
• Borrowers who are assuming mortgages are not eligible for an MIP refund.
• In order to obtain an MIP refund, the borrower must refinance the existing loan into another FHA loan.
• Borrowers who are delinquent in their monthly mortgage payments or who have entered into the foreclosure process are ineligible.

There is another type of Federal Housing Administration mortgage insurance, which is the FHA’s annual Mortgage Insurance Premium (MIP). This insurance program or Annual MIP, is spaced out over 12 installments per year. As opposed to the Upfront option, its amount is included in the borrower’s monthly mortgage payment.

Sometimes it is difficult to figure out on the monthly mortgage statement, due to the fact that the FHA MIP is a line-item, and often listed as “HUD Escrow,” “Risk-Based HUD,” or “Monthly Mortgage Insurance.” Most borrowers assume that it will be designated as “FHA mortgage insurance.”

Please note that Annual MIP is required for all FHA mortgages. The size of the premium is determined by the loan’s exact characteristics, and when the loan was initiated.

Due to the fact that the FHA has changed its annual MIP requirement multiple times since 2008, the annual mortgage insurance premium for a loan differs from year to year.