FHA is one of the most, if not the most, popular ways that first-time homebuyers finance their purchase. FHA stands for Federal Housing administration, a division of HUD (housing and urban development) that ensures loans to homebuyers with low down payments. These down payments at 3.5% of home price would probably not be made by banks without the federal guarantee.
So, what is MIP? MIP stands for Mortgage Insurance Premium, charged by FHA when approving a loan. The money from MIP goes into a pool that helps fund the federal guarantees for loans against default by the home owners. There are two different MIP charges: Upfront and Monthly.
The upfront MIP charger from loans is 1.675% of loan amount. So, if you had a loan amount of $100,000, you'd have an upfront MIP charge of $1,675. FHA does allow this upfront premium, however, to be rolled into the loan amount. So the actual loan amount stated on all of your documents would be $101,675.
In addition to the upfront MIP, there is a monthly premium that you will pay to go into the same mortgage insurance fund. This amount has an interest of 1.25%. To find out what the monthly MIP charge is, you'd multiply the amount by 1.25% and divide the amount by 12. Therefore, the MIP amount on a loan of $100,000 would be $1,250, which divided by twelve would be around $104.17 a month.
Because the monthly fee has gone up dramatically in the past few years, the issue has come up that many think that FHA financing is too expensive for some buyers. In our next article we'll discuss other financing ways that don't have this MIP.
