Mortgage Insurance Premiums: A Brief Explanation
FHA loans are one of the most popular loans for Knoxville first-time buyers. They offer a low down payment mortgage option for those buyers who may not have perfect credit.
There’s a lot of different terminology in the mortgage world, that it can be overwhelming to understand what it all means and if those terms apply to you. One thing you may have heard about is mortgage insurance premiums. In this post, we’ll cover what exactly mortgage insurance premiums are and how they apply to FHA loans.
What Is MIP?
Mortgage insurance premiums are required on all FHA loans. Mortgage insurance premiums is an insurance policy that helps protect the mortgage company should the borrower default.
Since FHA loans only require a 3.5% down payment, the government requires that lenders have some level of added protection. Mortgages that have a lower down payment are considered more risky since the borrower has less invested in the home.
It is important to remember that this policy exists to protect a mortgage company, not a borrower.
How Much Does MIP Cost?
There are two different types of mortgage insurance premiums. There’s annual mortgage insurance premiums and upfront mortgage insurance premiums. You’ll pay both types of mortgage insurance if you buy a home with an FHA loan.
Here’s an explanation of both types and how much they cost.
Upfront Mortgage Insurance Premiums. The upfront mortgage insurance cost is currently 1.75% of the loan amount. That means if you buy a home from $200,000, you’ll pay $3,500 in mortgage insurance at closing. Upfront MIP will be included in as part of your closing costs.
Annual Mortgage Insurance Premiums. The annual mortgage insurance premiums is .85% for most FHA loans. Your annual MIP will be included as part of your monthly mortgage payments.
Can You Get Rid Of MIP?
Unfortunately, mortgage insurance premium last for the life of the loan. Previously with FHA loans, MIP would go away at some point, but that is not the case anymore. If you buy with an FHA loan, you’ll pay MIP as long as you own the house.
The only other way to get rid of MIP is to refinance into another loan type once you gain more equity in a home. Depending on the interest rates at that time, this may or may not make sense for you.
While MIP can be costly, it does help many first-time buyers to get into their first home with a low down payment. Without MIP, there would be many first-time buyers who are stuck saving up for a down payment.
Buying your first Knoxville home is an exciting and overwhelming experience. If you’re like most first-time buyers, you may not be sure where to start. If there is anything we can do to help you in your home search, please do not hesitate to contact us. We’ve helped countless homeowners buy their first home and we’d love to do the same for you. Rick can be reached at 865-696-9002 or via email at Rick@KnoxvilleHomeTeam.Com. Kati can be reached at 865-696-1888 or via email at Kati@KnoxvilleHomeTeam.Com.
Are you ready to start your home search? Visit our home search page to get started today. Or, be sure to keep up with our Knoxville First Time Home Buyer’s Blog to keep up with the latest information about buying your first home.