Understanding Up-Front Mortgage Insurance
Up-front mortgage insurance is an insurance premium typically collected on Federal Housing Administration (FHA) loans when the loan is initiated. Unlike private mortgage insurance (PMI), which is paid monthly, up-front mortgage insurance is a single lump sum, often integrated into closing costs.
Key Takeaways
- Up-front mortgage insurance (UFMI) amounting to 1.75% of the loan is collected on FHA loans.
- This insurance safeguards lenders against borrower defaults.
- UFMI can be a separate payment at loan closing or included in ongoing mortgage payments.
The Necessity of Up-Front Mortgage Insurance
Just like PMI, FHA mortgage insurance aims to protect lenders. FHA loans often enable buyers with lower equity—usually as low as 3.5% down payment—to qualify for a mortgage. The presence of mortgage insurance mitigates the risk for lenders in case a borrower defaults, offering them financial protection.
Since 2015, UFMI is set at 1.75% of the loan’s amount, protecting the lender by providing added security. Some borrowers opt to pay this amount upfront, but it’s commonly rolled into the loan, increasing long-term interest costs.
In addition to UFMI, borrowers are responsible for ongoing mortgage insurance premiums, ranging between 0.45% and 1.05% of the mortgage amount. These are required until the loan-to-value ratio drops below certain thresholds.
Efficient Collection
Up-front mortgage insurance premiums are collected efficiently through a secure electronic portal by the U.S. Department of Treasury, via HUD, ensuring timely processing.
Special Considerations
Homeowners might be eligible for a prorated refund if they sell their home within five to seven years of paying the UFMI. Those with FHA loans obtained before June 2013 can cancel UFMI after five years, provided specific conditions are met.
Strategic Tips to Avoid Up-Front Mortgage Insurance (UFMI)
Unique Approaches:
- Conventional Mortgage Loan: Avoid upfront mortgage insurance with an 80% loan-to-value or less, be it for new purchases or refinancing.
- 20% Down Payment: Reduces lender’s risk and nullifies the need for mortgage insurance.
- Second Mortgage: Avoid insurance with a combination of smaller first and second mortgages totaling 20%.
- Seller Assistance: Seller financing can supplement your down payment, effectively dodging mortgage insurance.
Refunds for Up-Front Mortgage Insurance
Refunds on the up-front mortgage insurance premium are primarily available if refinancing into a new FHA-insured mortgage within three years of the original loan. Beyond this period, refunds aren’t generally available.
Calculating FHA UFMI Premiums
The UFMI premium amounts to 1.75% of the loan. For a loan of $200,000, the UFMI would be $3,500, resulting in an adjusted loan amount of $203,500.
Payment Options for UFMI
UFMI can be paid entirely in cash at loan closing or rolled into the loan. Both options must be fully committed to without partial payments in different manners and any cash payments augment the total cash settlement requirements.
Related Terms: private mortgage insurance, PMI, loan-to-value ratio, equity, conventional loans.
References
- U.S. Department of Housing and Urban Development. “Loans”.
- U.S. Department of Housing and Urban Development. “FHA Single Family Housing Policy Handbook”, Page 972.
- U.S. Department of Housing and Urban Development. “Discontinuing Monthly Mortgage Insurance Premium Payments”.
- U.S. Department of Housing and Urban Development. “Single Family Mortgage Insurance Premium Collection Process”.
- U.S. Department of Housing and Urban Development. “FHA Single Family Housing Policy Handbook”, Page 573.
- US Department of Housing and Urban Development. “How does a lender know if a loan is eligible for an upfront mortgage insurance premium refund?”
