FHA Mortgage Insurance Explained - Save More on Your Home

46% of first-time homebuyers in the US opt for FHA loans. These loans offer accessible down payments and flexible credit requirements. But they require Mortgage Insurance Premiums (MIP), which can increase your monthly expenses.

Understanding how FHA MIP works, its costs, and ways to minimize it can help you make an informed decision. In this guide, we break down everything you need to know about FHA mortgage insurance to help you navigate home buying smarter.

Mortgage Insurance Premium (MIP) is a type of insurance that borrowers must pay when they take out an FHA loan. It consists of two parts:

• An upfront premium which is paid at closing
• A monthly premium is added to the mortgage payment.

The loan includes the upfront premium in its amount. The monthly premium depends on the loan amount, term, and down payment. These premiums protect the lender. They reduce the risk of lending to borrowers with lower credit scores or small down payments.

FHA loans require mortgage insurance to protect lenders from losses in case a borrower defaults on their loan. This insurance removes the risk associated with low down payments, often as low as 3.5%, which are common with FHA loans.

By requiring MIP, the FHA enables lenders to offer better loan terms to borrowers. These borrowers might not qualify for conventional loans due to low credit scores or small savings for a larger down payment.

Moreover, FHA loans are designed to support homeownership among lower-income individuals and first-time buyers. The MIP lets borrowers access loans that are otherwise unavailable. This insurance costs more, but it can be better than waiting years to save for a larger down payment. It helps you enter the housing market faster.

Get Pre-Qualified and Save Up to 1.5% at Closing with reAlpha

Save up to 1.5% at closing when you combine real estate and mortgage services with reAlpha.

Check If You Qualify

The cost of FHA Mortgage Insurance Premiums includes both an upfront and an annual component:

Typically 1.75% of the base loan amount, is paid at closing. For example, on a $400,000 loan, the UFMIP would be $7,000.

Calculated annually but paid monthly, the rate varies based on loan terms, loan amount, and loan-to-value (LTV) ratio. As of 2025, for loans over 15 years with a base loan amount less than or equal to $726,200:

• LTV ≤ 90%: Annual MIP is 0.50% of the loan amount.
• LTV > 90% but ≤ 95%: Annual MIP is 0.55%.
• LTV > 95%: Annual MIP is 0.55%.

For loans up to 15 years, the annual MIP rates are generally lower. For instance, with an LTV of 90% or less, the annual MIP can be as low as 0.15%.

The following chart outlines typical MIP rates based on different loan terms and down payment amounts:

These rates show that higher down payments can lower annual MIP rates. This, in turn, reduces long-term costs for borrowers.

Did you know that you can reduce your monthly mortgage payments without refinancing? Discover how a recast mortgage can make your loan more affordable.

An FHA mortgage insurance calculator helps you estimate your monthly payments. It includes principal, interest, taxes, insurance, and mortgage insurance premiums (MIP). To use one:

• Home Value: Enter the property's purchase price.
• Down Payment: Specify your down payment amount or percentage.
• Loan Term: Choose the loan duration (e.g., 15 or 30 years).
• Interest Rate: Provide the expected interest rate.

• Upfront MIP (UFMIP): Typically 1.75% of the base loan amount, often added to the loan balance.
• Annual MIP: Varies based on loan term, amount, and loan-to-value (LTV) ratio.

The calculator will show estimated monthly payments. It will break them down into principal, interest, taxes, insurance, and MIP.

Buying a Home? Get up to 1.5% Cash Back at Closing

Get pre-approval first, then start exploring homes knowing you can receive up to 1.5% of the home price back at closing.

Find your dream home

Mortgage Insurance Premium (MIP) and Private Mortgage Insurance (PMI) serve similar purposes. But, they apply to different types of loans. MIP is specifically associated with FHA loans, while PMI is linked to conventional loans. Here are the key differences:

If you're considering different loan options, VA loans are assumable, potentially offering long-term savings. Learn more about VA loan benefits.

FHA loan insurance comes with distinct advantages and disadvantages that potential borrowers should consider.

• Protects the Lender: The MIP gives lenders security. This makes them more likely to offer loans to borrowers with lower credit scores and smaller down payments.
• Increased Loan Accessibility: FHA insurance makes it easier for people with less-than-perfect credit to qualify for a loan. This expands access to homeownership for a larger pool of potential buyers.

• Ongoing Costs: Borrowers must pay both an upfront premium (typically 1.75% of the loan amount) and annual premiums. These fees can significantly increase the total cost of the loan.
• Impact on Monthly Payments: The extra MIP fees are often in the monthly payments. This makes them higher than conventional loans without mortgage insurance.

To illustrate how FHA mortgage insurance costs work, consider a scenario. A borrower purchases a $400,000 home with a 3.5% ($14,000) minimum down payment. Here’s a breakdown of the costs:

• Upfront Mortgage Insurance Premium (UFMIP): UFMIP is calculated at 1.75% of the loan amount. For a $386,000 mortgage ($400,000 - $14,000), UFMIP would be approximately $6,755. This can be paid at closing or financed into the loan.
• Monthly Mortgage Insurance Premium (MIP): Based on the loan amount and term, let’s assume an annual MIP rate of 0.55%. This results in a monthly MIP cost of about $177.

The borrower will pay this monthly premium for the life of the loan unless they refinance or meet specific conditions to cancel it.

In total, this borrower would incur significant costs from both UFMIP and monthly MIP over time. Understanding these figures helps homeowners budget and see if an FHA loan fits their financial goals.

Want to access extra cash while keeping your FHA benefits? An FHA cash-out refinance lets you tap into your home equity while maintaining affordable rates.

FHA loans are a smart choice for first-time homebuyers and people with lower credit scores. They offer low down payments and flexible qualification rules. However, it's important to factor in the costs of mortgage insurance.

One way to offset these costs and make your home buying experience even more affordable is through reAlpha. With reAlpha you can eliminate the typical 3% commission fees, allowing you to keep more of your hard-earned money.

Getting financial help for your down payment? A gift letter for mortgage approval ensures your funds meet FHA guidelines and avoid delays.

Save Thousands on Your FHA Home - Go Commission-Free with reAlpha!

FHA loans make homeownership easier, but mortgage insurance adds extra costs. Why let 3% realtor fees drain your savings? With reAlpha’s commission-free buying, you keep more of your money - $9,000 saved on a $300,000 home!

• Cut hidden costs. Boost your buying power. Own smarter.
• Your home. Your savings. Your future.