adminAbout Mortgage Insurance Premium:
Mortgage insurance premium (MIP) is a type of mortgage insurance that is required of homeowners who take out loans backed by the Federal Housing Administration (FHA). Unlike conventional loans, which typically only require private mortgage insurance (PMI) if a home down payment is less than 20% of the purchase price, all FHA loans require MIP.
KEY TAKEAWAYS:
- Mortgage insurance premium (MIP) is paid by homeowners who take out loans backed by the Federal Housing Administration (FHA).
- FHA-backed lenders use MIPs to protect themselves against higher-risk borrowers who are more likely to default on loans.
- FHA mortgages require every borrower to have mortgage insurance.3
Understanding Mortgage Insurance Premium (MIP):
FHA-backed lenders use mortgage insurance premiums as a tool to protect themselves against higher-risk borrowers. Since FHA loans come with a down payment as low as 3.5% with a credit score as low as 580, default is a key concern.
FHA mortgages:
FHA mortgages require every borrower to have mortgage insurance.3 Conversely, conventional loans only need private mortgage insurance (PMI) policies if the down payment amount is less than 20% of the property’s purchase price. Each FHA loan requires both an upfront premium of 1.75% of the loan amount and an annual premium of 0.15% to 0.75%.4 Payment of upfront premiums is at the loan issuance. Determination of the exact yearly cost comes from the term of the loan, amount borrowed, and loan-to-value ratio (LTV).
Each month, the loan’s payment amount will reflect the annual premium divided by 12 months along with the principal payment. Other charges usually added to the monthly fee include escrow amounts for property taxes and homeowner’s insurance coverage.
How Much Does Mortgage Insurance Premium Cost?
The upfront MIP is 1.75% of the loan amount, so if you borrow $200,000, you’ll pay $3,500 at closing. The annual payment portion, which is between 0.15% and 0.75% of the loan amount, depends on the base loan amount, LTV ratio, and duration of the mortgage term. The lowest annual payment portion is for loans of less than 90% LTV and 15 years in length.
Tax Implications of Qualified Mortgage Insurance Premiums:
Until the 2017 Tax Cut and Jobs Act, mortgage insurance premiums were deductible in addition to allowable mortgage interest.8 The Further Consolidated Appropriations Act of 2020 allowed tax deductions for MIP and private mortgage insurance (PMI) for 2020 and retroactively for 2018 and 2019.9
However, the Act expired, and mortgage insurance premiums are no longer deductible.
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