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FHA mortgage insurance may seem expensive, but it's important to put the cost in perspective. Many homeowners would not otherwise be able to refinance to current low rates due to fallen property values; FHA loans provide refinancing options for those with little to no home equity.

FHA Mortgage Insurance: What it Costs and Why

FHA mortgage insurance is an obstacle for some homeowners wishing to refinance to today's low mortgage rates. FHA insures its approved lenders against losses on its home loan programs.

FHA Assumes Higher Risk, Passes Some Cost to Borrowers

Conventional mortgages typically require at least 10% down, and in today's stricter credit environment, 20% down is typical. FHA offers mortgages with as little as 3.5% down, although down payment requirements can vary from 3.5% to 10% depending on factors including your credit rating, if you're taking additional cash out, and whether or not you have home equity financing. High loan-to value ratios are riskier for lenders. FHA as borrowers have little investment in their homes and are perceived to be more likely to abandon ship when hard times arrive.

When an FHA-insured mortgage is foreclosed, the lender files a claim with FHA and is reimbursed for its losses. Unlike many government programs, taxpayers do not pay for reimbursing mortgage lenders; FHA charges borrowers of FHA-insured mortgages an up-front premium at closing, and continues to collect annual premiums. The up-front mortgage insurance premium (UFMIP) will soon increase to 2.25% of the mortgage amount. Mortgage lenders accommodate this cost by rolling the UFMIP into the mortgage loan amount, or by paying it on the borrower's behalf in exchange for a higher mortgage rate.

FHA Annual MMI Premiums Added to Mortgage Payments

Annual mortgage insurance (MI) I premiums are currently charged at the rate of .50 or .55% depending on LTV. The MI amount is calculated based on your loan amount not including the UFMIP. If your loan amount is $200,000, and your MMI premium rate is .50%, your yearly premium would be $1000; your mortgage lender would divide this by 12 and add the resulting amount of $83.33 to your monthly payment.

Karen Lawson
Karen Lawson is a freelance writer with extensive experience in mortgage banking and home loan loss mitigation programs. She holds BA and MA degrees in English from the University of Nevada, Reno.