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What you’ll learn:
— What the up-front mortgage insurance premium (UFMIP) is
— How UFMIP affects up-front costs and monthly payments on FHA loans
— How to calculate and pay your UFMIP
— Tips for getting a refund or avoiding UFMIP altogether
Buying a house comes with plenty of fees, and it’s easy to feel overwhelmed. A Federal Housing Administration (FHA) loan can make homeownership more accessible with a smaller down payment. But, important to understand the one-time charge: the FHA up-front mortgage insurance premium (UFMIP).
This article will cover all you need to know about mortgage insurance for FHA loans, show how lenders calculate and collect it, and provide strategies to avoid it.
What’s an up-front mortgage insurance premium?
UFMIP is a one-time fee that homebuyers have to pay on FHA loans. It’s usually 1.75% of the loan amount and helps protect lenders if you default. You can pay it at closing or roll it into your loan. FHA loans are meant to help homebuyers with smaller down payments or poorer credit scores qualify for a mortgage.
In simple terms, UFMIP bridges the gap between what a homebuyer needs to buy a property and the risk a lender takes on when approving the loan.
UFMIP vs. MIP: What’s the difference?
There are two parts to FHA mortgage insurance:
— UFMIP: This is a one-time fee you can either pay in full at closing or finance into your loan.
— Mortgage insurance premium (MIP): MIP is an ongoing annual premium paid monthly as part of your mortgage. The rate usually ranges from 0.15%—0.75%, depending on your loan amount, term, and down payment.
With an FHA loan, you’ll pay both. The UFMIP is a fixed amount, based on your loan, while the MIP depends on factors like your loan balance, term, and down payment. Think of it like joining a club: The UFMIP is the entry fee, and the MIP is your annual membership dues.
How do lenders calculate up-front mortgage insurance premiums?
Calculating UFMIP is pretty straightforward. You just need to know your loan amount and the UFMIP percentage, which is currently set at 1.75% of the base loan amount.
UFMIP = loan amount x 1.75%
Here’s an example:
— Home price: $400,000
— Down payment: $14,000
— Base loan amount: $386,000
— UFMIP percentage: 1.75%
UFMIP = $386,000 x 0.0175 = $6,755
In this scenario, Nicole is buying her first home for $400,000 with an FHA loan. She’s able to put down $14,000, leaving her with a base loan amount of $386,000. Her UFMIP comes to $6,755. Nicole decides to roll the UFMIP into her loan, which increases the loan balance to $392,755.
By financing the UFMIP, Nicole avoids paying $6,755 up-front, but she’ll pay interest on that amount over the life of her loan.
Notably, calculating both MIP and UFMIP before taking out an FHA loan helps you see how they’ll affect your closing costs and monthly payments.
How do you pay UFMIP?
You have two ways to handle UFMIP:
— Pay it at closing: Cover the full UFMIP fee at closing to avoid paying interest on the premium. Keep in mind that this does increase your initial out-of-pocket costs.
— Finance it into your loan: You can add UFMIP to your mortgage balance to lower your up-front costs. Doing so, though, elevates your loan amount and the interest you pay over the life of the loan.
Is the up-front mortgage insurance premium refundable if you refinance?
You can get a partial refund on the FHA UFMIP in certain circumstances. If you pay off your FHA loan or refinance into a new FHA loan within three years of your original closing, the U.S. Department of Housing and Urban Development (HUD) calculates a prorated refund based on how long you held the loan. The sooner you act, the larger the refund.
HUD typically sends this refund to the homebuyer or lender, depending on the payoff method. You might need documentation, like a payoff statement or proof of payment, to claim it. Remember, you’re only eligible for a refund on FHA-to-FHA refinances, which means refinancing into a conventional loan doesn’t qualify.
How to avoid paying for UFMIP
UFMIP is mandatory for FHA mortgages, but you can reduce or avoid it by choosing an alternative home financing pathway. Here are some options to consider:
— Use a second mortgage: Take out a “piggyback” second mortgage (home equity loan or HELOC) to help avoid insurance premiums. This approach doesn’t apply to FHA loans, which charge mandatory mortgage insurance premiums.
— Add a cosigner or co-borrower: Including a cosigner or co-borrower may help you qualify for a different loan that doesn’t require UFMIP.
At Better, we offer a range of mortgage loan options designed to fit your homebuying needs. Our streamlined application process makes it easy to get started and move forward with confidence.
...in as little as 3 minutes – no credit impact
Get a Better mortgage that works for you
Buying a home comes with a lot to consider. From understanding up-front costs like down payments and UFMIP to understanding how they affect your loan payoff, it’s essential to be clear on your FHA mortgage options.
At Better, we do our best to make navigating this process easier. As a digital FHA-approved lender, we offer fast online cost estimates and a streamlined application process. Start your pre-approval today and take the next step toward homeownership with confidence.
...in as little as 3 minutes – no credit impact
FAQ
Does UFMIP count as a closing cost?
Yes, UFMIP is considered part of your closing costs, even if you finance it into your loan and pay it over time.
How much is the FHA up-front mortgage insurance premium?
The FHA UFMIP is 1.75% of your total loan amount. For example, if you buy a $350,000 house, your loan amount would be $340,000. Your UFMIP would be $5,950.
Do all FHA loans require up-front UFMIP?
Every FHA loan requires UFMIP, including initial purchase and refinance loans. However, you have the choice to pay the UFMIP all at once when you close or finance it into your loan.