If you get an FHA mortgage you are required to pay both an upfront and monthly mortgage insurance premium, which is also called MIP. In short, FHA MIP provides insurance that protects lenders in the event that you default on your mortgage and you cannot repay your loan.
The upfront MIP for most FHA loans is 1.75% of the mortgage amount. You are required to pay the upfront MIP at closing and there are two ways to pay for it: you can either pay the fee out-of-pocket using your personal funds, or you can finance the fee, which means you add it to your mortgage amount. Most applicants choose to finance the fee, especially if they are short on funds to pay for other closing costs or their down payment.
If you finance the upfront FHA MIP, the amount of the fee is simultaneously transferred from your mortgage proceeds at closing. For example, the upfront MIP for a $100,000 FHA mortgage is $1,750 ($100,000 (base loan amount) * 1.75% = $1,750). In this scenario, your total mortgage amount is $101,750 because you add the MIP fee ($1,750) to your base loan amount ($100,000).
Use ourFHA LOAN CALCULATORto determine the upfront and monthly MIP for any loan amount
In this case, the upfront MIP may appear two times on your loan documents -- under closing costs you are required to pay and as an addition to your mortgage amount. Although the fee appears twice, you are only required to pay it once and adding it to your loan shows how you are going to pay for it, rather than charging you a second time.
In the vast majority of cases, lenders do not attempt to charge you twice for the same MIP fee as that would be mortgage fraud. Because the FHA program is backed by the federal government, the penalty for mortgage fraud is especially severe.
There are a couple of other points to keep in mind regarding FHA MIP. First, as noted above, you can also elect to pay the upfront FHA MIP with your personal funds, such as a bank account.
You should notify your lender at the beginning of the mortgage process if you want to pay for the upfront MIP out-of-pocket. In this case, your loan balance is smaller, your monthly mortgage payment is slightly lower and your total interest expense is moderately less.
The other point to consider is that you may also be required to pay for the first year of monthly FHA MIP at closing. The monthly MIP fee depends on your mortgage amount, loan-to-value (LTV) ratio and loan length.
Depending on your lender and other factors, you may be required to prepay this cost for at least a year, which is an additional closing cost. Prepaying monthly FHA MIP fees should not be confused with the upfront MIP fee as these are separate expenses.
In closing, if you are not comfortable with the fees charged by your lender, ask for an explanation. Do not sign any loan documents until you fully understand all of the closing fees and costs you are being asked to pay. If you determine that a lender is overcharging you, you can cancel your mortgage any time before you sign loan documents and work with a different lender.
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"Appendix 1.0 – Mortgage Insurance Premiums." FHA Single Family Housing Policy Handbook 4000.1. Federal Housing Administration, January 2 2020. Web.
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