FHA Loans, Mortgage Insurance Premiums, and My Extra Income

Some good news has come up in the last couple of weeks, as I’ve happened upon a temporary job for the next couple of months. Since we’re buying a house, we looked at what we can do with the extra income.

For background, we’re getting a 30-year fixed rate FHA mortgage for our town house. This means that our interest rate will remain the same through over the life of the mortgage. Since it’s an FHA loan, however, there are some differences vs. conventional loans.

FHA loans and the Mortgage Insurance Premium

With a conventional loan, if you make a downpayment of less than 20% of the purchase price, you either have to pay for Private Mortgage Insurance (PMI), or take out a piggyback loan to make up the difference. With an FHA loan, if your downpayment is less than 20%, you have to pay a Mortgage Insurance Premium (MIP).

For loans with terms longer than 15 years, the law currently requires your MIP to remain in place for at least 5 years, whether or not your loan-to-value (LTV) ratio drops below 78%. With a conventional loan, most lenders will allow you to drop your PMI, though you might have to make a special request.

Keeping that MIP in place — at a cost of roughly $50/month for 5 years — will take up money that we could use for other things. We had hoped to use my extra earnings to pay for it in advance and keep it from getting rolled into the mortgage, but…

I called the Housing and Urban Development (HUD) hotline for the FHA’s resource center (1-800-CALL-FHA) to asked about doing this and was told that we can’t. While that was a bit disappointing, we’ve decided to change our game plan a bit.

Our new plan for my windfall income

We’ve always been careful to avoid putting ourselves in a financially vulnerable position, so we’ve decided to continue down that road by putting using my extra income to increase our emergency fund.

We’re also going to put some toward a refrigerator for the townhouse (which doesn’t come with one). We were going to buy a friend’s fridge which still was under warranty, but it was too big to fit. So now we’re in the market for a new one. If you have any suggestions, they’d be greatly appreciated. Hopefully, this new appliance rebate program can work out for us. 🙂

Closing thoughts

The home-buying process has been very crazy so far. Hopefully, it’ll turn out alright when all is said and done. Have you ever had an FHA loan? If so, how was your experience? And do you have any tips to share?

Note: The good news is that MIP payments are, in many cases, partially refundable. If you have an FHA loan and are wondering if you’re due a refund, go to the HUD refund site and enter your loan details.

15 Responses to “FHA Loans, Mortgage Insurance Premiums, and My Extra Income”

  1. Anonymous

    A lots of lawmakers are uneasy that inside the post-2008
    world, Fannie and Freddie include the mortgage market.
    If you have bad credit, you may be wondering how difficult it would be to refinance your current mortgage.

    They make research, understand the nature of leading lenders available inside market, compare the interest rates then match such options while using client’s specific needs in
    connection with refinance, renewal, purchase, real-estate investments,
    debt consolidation and a lot more.

  2. Anonymous

    Hello! I realize this is kind of off-topic but I had to ask.
    Does operating a well-established blog like yours take a large amount of work?
    I am brand new to blogging however I do write in my journal every day.
    I’d like to start a blog so I can easily share my experience and thoughts online. Please let me know if you have any ideas or tips for new aspiring bloggers. Thankyou!

  3. Anonymous

    I just went under contract on a house last week. I also looked at FHA loans but decided against that due mainly to the 1.75% upfront and the 5 year minimum MIP premium. I was able to put only 8% down but with the first-time tax credit and no car payment at this time I’m going to reach 80% L/V within 6-7 months of closing. I will then resume normal monthly payments on a 15-year fixed mortgage. Without the tax credit I probably would have waited a year before buying.

  4. Anonymous

    Hi Laura,

    I checked a HUD website and if I interpreted it correctly, here are a couple of opinions for you. I hope this help.

    The upfront fee looks like you can pay it either upfront or totally in the loan, but not a combination. It also looks like the fee is required for condos, too.

    By the way, here is another thought for you. If you are lucky enough to have extra income once in a while and the value of your home increases at a good pace, perhaps the combination can bring your mortgage down to 80% before 5 years are over. If rates are good when this happens, you could refinance into a conventional loan, have no monthly mortgage insurance and get a refund on a portion of the UFMIP.

  5. Anonymous

    Nickel (4)–I left the mortgage business at the tail end of last year, and while waiving upfront MIP on condos was the rule for many years, I THINK (!!!) it’s been added since.

    The regs are confusing, even for people who are in the business. As a practicioner, you rely on interpretations rather than the publications, because the publications are prepared in legalese and not meant to be comprehended by the masses.

  6. Anonymous

    Laura–on the refund of MIP by FHA… the part that’s refunded is the upfront premium, the 1.75% that’s added to your loan amount. Since the monthly premiums are “pay as you go” they aren’t refunded.

    The upfront MIP is only refundable if the loan is paid off within the first five years of the term, and then on a pro rata basis. If you refinance from one FHA loan to another, the refund is deducted from the new up front amount.

    If you refinance to a non-FHA loan, or sell the house, the refund is mailed to you after the closing, usually several weeks later.

    Hope this helps!


  7. Anonymous

    Laura, I can relate to the craziness of trying to buy your first home. We are currently under contract and are in the process of assuming a 15 year fixed conventional mortgage. We are putting 10% down and taking out a 10% piggy back loan in order to avoid PMI. Was the down payment amount your primary reason for taking out the FHA? We didn’t do much research regarding FHA loans.


  8. Anonymous

    You can pay it upfront, we did actually but not really by choice. We had planned on rolling it into the mortgage but the bank didn’t have the paperwork ready until the morning of the closing so I didn’t have a chance to look them over. They ended up *not* rolling the upfront fee into the mortgage and I had to pay it at closing. By this point I just wanted to close on the house so I didn’t make them redo the paperwork.

  9. Anonymous

    If you decide you want a new-with-warranty, go to the back of a big box home improvement store. The scratch and dents are back there for a few hundred less – it’s ridiculous, and often the blemish, such as it is, will be hidden by your kitchen’s cupboards or design.

    As far as brands go, we had a GE for 30 years, and then an Amana that lasted for just 6, which was really disappointing after that long life of the GE. I think this is a situation where they just don’t make ’em like they used to. I’m sure someone else will have better brand advice than I’ve provided here.

    Finally, the freezer-on-the-top models are said to be the most energy-efficient.

  10. Anonymous

    Ok,I finally found a clearer answer in the handbook they sent for first time buyers:

    When you get a mortgage loan insured by FHA, you have to pay an up-front insurance premium, which can be included in the loan you get through a lender. You will also have to pay a monthly insurance premium
    that is added to the regular mortgage payment. FHA uses the premiums to pay the lender if you default on your mortgage.

  11. Anonymous

    If you followed me on Twitter, you probably saw how unproductive that phone call was. I wanted to see about paying the upfront MIP for the condo, which was in my good faith estimate. The CSR said that was normal. I then asked about paying the fee upfront, so we can lower the total loan amount.

    I basically got a confusing answer. I did receive the following answer,though, through email:

    The UFMIP must be entirely financed into the mortgage (except for any amount less than $1) or paid entirely in cash and all mortgage amounts must be rounded down to a multiple of $1. Any UFMIP amounts paid in cash are added to the total cash settlement requirements.

    Handbook 4155.2: 7.2.b

    Thanks ML for the Craigslist tip. I check them out weekly and I see some good deals occasionally.

  12. Anonymous

    I would suggest using craigslist and buy your appliances used. Thanks to HGTV there is a stainless kitchen craze going on. This results in a glut of appliances that are less than 5 years old for sale on craigslist. For example, in the forclosure I bought in January I got a fridge, gas stove, dishwasher and microwave all under 5 years old and all off craigslist for a total of $920. Even if one of them were to fail, I am way ahead of forking out new appliance prices. Same concept applies to laundry rooms due to the front loading washer and dryer craze.

  13. Tim: I looked into the upfront premium when first reading Laura’s post (prior to publication), and I think based on what I found that there is no upfront premium on a condo purchase. The HUD website is very difficult to navigate, though, so it’s hard to find concrete info. I’m sure Laura will be able to weigh in later with more info.

  14. Anonymous

    Thanks for the refund tip. We just bought a home with a FHA backed mortgage last month and I was trying to figure out if either the upfront MIP or the monthly payments were tax deductible.

    One thing you might also want to point out is that with a FHA loan there is also an upfront MIP at closing which is equal to 1.75% of the loan (I think it’s 1.75%). People typically role that into the mortgage but sometimes you just pay it at closing too.

Leave a Reply