What is an FHA mortgage insurance premium (MIP)?

Federal Housing Administration mortgages help borrowers with lower credit scores and limited savings for a down payment buy a home. One way the agency covers this is through FHA mortgage insurance premiums (MIP). Borrowers pay both an up-front and an annual MIP to insure lenders against financial losses, which encourages more lenders to offer FHA loans.

Learn more about how FHA home loan mortgage insurance works, how much it costs, and alternatives to paying MIP.

What is MIP?

MIP is a kind of mortgage insurance that protects lenders by covering their losses when a borrower defaults on an FHA loan. This reduces the risk lenders take in offering FHA loans and makes them more likely to offer this type of mortgage.

FHA borrowers pay an up-front MIP when they close on their loan, and an annual MIP that is divided into monthly installments and added to their mortgage payment.

The amount borrowers pay for MIP depends on their loan amount and down payment.

Up-front MIP

FHA loan borrowers must pay an up-front MIP equal to 1.75% of their loan amount.

Your up-front MIP is due when you close on your FHA loan. You can pay it in cash as part of your closing costs or add the MIP amount to your loan principal.

If you take out an FHA loan for $350,000 to buy a home, your up-front MIP payment will be $6,125.

Annual MIP

FHA loan borrowers also must pay an annual MIP, which is divided into monthly installments and added to the mortgage payment.

The annual MIP is calculated each year, using the expected average monthly loan balance for the year. That's calculated by adding the expected balance after each monthly payment and dividing by 12. That amount is multiplied by the MIP rate for your loan to get the total annual MIP, which is divided by 12 and added to each monthly payment.

As you pay down your mortgage balance, your annual MIP also will decrease.

How long do you have to pay for MIP?

How long you need to pay the annual MIP depends on your down payment.

If your down payment is 10% or more of the purchase price, the annual MIP requirement is removed after 11 years. If your down payment is less than 10%, you'll pay the annual MIP for the life of the loan or until your loan is paid off or refinanced.

How much is the annual MIP?

Your loan term and down payment are the major factors determining your annual MIP. The following chart shows the various rates and durations for annual MIP payments.

How to reduce or eliminate your FHA mortgage insurance

There’s no way to avoid paying MIP when you take out an FHA loan. However, there are a few ways that you can reduce what you pay or stop paying a few years into your loan.

Save for a larger down payment

The easiest way to reduce your MIP costs is to make a larger down payment. If you’re able to bring at least 10% to the closing table, you’ll qualify for a lower annual MIP payment that you pay only for 11 years. You’ll also lower the amount that you borrow, which will reduce your up-front premium.

Refinance to a conventional loan

Many homeowners refinance an FHA loan to a conventional loan when they reach 20% home equity.¹ Conventional loans where the owner has at least 20% home equity pay no private mortgage insurance (PMI), so that's the point where refinancing allows you to avoid both forms of mortgage insurance.

Keep in mind that to refinance from an FHA loan to a conventional loan, you must meet conventional loan requirements for credit history, debt-to-income ratio (DTI), and home equity.

Choose a different government-backed loan

To avoid MIP, you may want to consider other types of government home loans.

USDA loan

USDA loans help low- to mid-income borrowers buy a home in specific rural areas with no down payment. Instead of mortgage insurance, you pay an up-front guarantee fee of 1%, compared with 1.75% for the up-front MIP, and an annual guarantee fee of 0.35%.

Rocket Mortgage currently doesn't offer USDA loans, but we want you understand all your borrowing options.

VA loan

VA loans are available only to active-duty military personnel, veterans, and their qualifying spouses.² VA loans require no down payment or monthly mortgage insurance but borrowers must pay a one-time VA funding fee of between 1.25% and 3.3%, depending on your down payment amount and whether you've used your VA loan benefit previously.

The bottom line: MIP is required on FHA loans

FHA mortgages require borrowers to pay an up-front MIP of 1.75% and ongoing annual MIP payments that vary by loan amount, down payment, and loan term.

While MIP adds to your monthly costs, it makes homeownership more accessible by encouraging lenders to offer FHA loans, which allow low down payments and credit scores. You can reduce MIP by making a minimum 10% down payment, eliminate it by refinancing to a conventional loan once you reach 20% equity, or avoid it by exploring alternative loan programs.

Ready to explore your FHA loan options and find the right mortgage for your situation? Explore your borrowing options today with Rocket Mortgage.

¹ Refinancing may increase finance charges over the life of the loan.

² Rocket Mortgage is a VA-approved lender, not endorsed or sponsored by the Dept. of Veterans Affairs or any government agency.

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