Your FHA Refinance: Mortgage Insurance Costs

by Karen Lawson
September 14th, 2009

FHA mortgage loans provide low down payment options (as low as 3.5 percent) and lenient credit requirements. This can be very helpful to people with bad credit or no credit; you can qualify if you’ve had a bankruptcy completed for at least two years or a foreclosure completed for at least three years. Refinancing to an FHA mortgage may be your only option for getting a lower mortgage rate If your home value has declined, and your mortgage amount is close to the amount your home is currently worth. 

One way that FHA can risk insuring mortgage loans with small down payments and mortgage loans for people with bad credit or little credit is requiring borrowers to pay for mortgage insurance.

FHA Mortgage Insurance Protects Lender

The FHA doesn’t make loans, but it does offer certain protections to mortgage lenders making FHA loans. FHA reimburses lenders for losses resulting from mortgage default and foreclosure. Although FHA suspended risk-based pricing for mortgage insurance for one year beginning October 1, 2008, it seems likely that the practice will continue as of October 1, 2009. If this is the case, borrowers would be required to pay a mortgage insurance premium determined by their loan-to-value ratio (LTV) and credit score. A percentage of the  mortgage insurance premium is due up front (UFMIP) when your mortgage or refinance closes, and the balance is an annual amount pro-rated and added to your monthly P&I payment. Here are some terms you’ll need to know:

  • Loan-to-value ratio: Calculate your LTV by dividing the amount of your mortgage loan or refinance by the current value of your home as determined by sales price or current appraised value. If your home is worth $250,000, and your mortgage loan or refinance amount is $225,000, your LTV is 90%. (LTV is calculated using loan amount before UFMIP is added.)
  • Mutual mortgage insurance (MMI): This is FHA’s mortgage insurance program.
  • Up Front Mortgage Insurance Premium (UFMIP) This is the amount of MMI due when your mortgage or refinance closes; most borrowers have the UFMIP added to their mortgage loan amount. The UFMIP amount is determined by your LTV and credit score, and is calculated at 1.75 percent of your mortgage amount.  For a loan amount of $225,000, the UFMIP would be $3938; adding this amount to the loan balance would increase the mortgage loan amount to 228,938..
  • Annual MMI premium: This is an annual amount you’ll pay for FHA mortgage insurance. If risk based MMI pricing resumes, it will be determined by your LTV and credit score. it can vary between between .50 and .55 basis points of your loan amount (not including the UFMIP amount) ; using our example of 90% LTV with a loan amount of $225,000,  50 basis points totals $1125 annually.

FHA loans are available at competitive mortgage rates,  and can offer solutions to difficult credit situations or in cases where home values have declined significantly. If you have bad credit, an FHA insured loan may provide access to the funds you need for buying a home or refinancing your current mortgage loan.

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This entry was posted on Monday, September 14th, 2009 at 3:56 pm and is filed under . You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.

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