When you take out an FHA loan, you’re required to pay two types of insurance: an upfront mortgage insurance premium (UFMIP) that you’ll roll into your financing or pay in cash at closing, and mortgage insurance premiums (MIP) that you’ll pay as part of your monthly mortgage payment.
These two insurances constitute your FHA funding fees, and they equal 1.75% and 0.45–1.05% of your loan amount respectively. You’ll pay MIP for the life of the loan—unless you pay 10% or more of your loan value at closing. For down payments that are greater than 10%, your MIP can be removed after 11 years
Technically, these two fees won't be called FHA funding fees on your loan documentation (“funding fee” is a term used on VA loans). But the concept is the same: the UFMIP and MIP you’ll pay with an FHA loan is what’s required for your loan to be funded. They both protect your lender from losing money if you default on your loan.
We’ll break down just how much these FHA funding fees will cost you, how you can pay for them, and what next steps you can take to save money once you lock down your loan.
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FHA funding fee: UFMIP and MIP
What is an upfront mortgage insurance premium (UFMIP)?
The upfront mortgage insurance premium (UFMIP) is a fee you pay one time at closing. The premium is always 1.75% of your loan amount. You can pay it upfront in cash with your other closing costs, or you can finance the cost by rolling it into your total loan amount.
How to calculate UFMIP
Calculating UFMIP is super easy: you just multiply the total amount of your loan by 1.75%.
For example, let’s say you’re buying a $300,000 home. You have a 3.5% down payment, which comes out to $10,500. You’re approved for an FHA loan for the remaining amount: $289,500. To calculate your UFMIP, you take 1.75% of $289,500, which is $5,066.25.
|Down payment (3.5%)||$10,500|
|Remaining loan amount||$289,500|
|UFMIP (1.75% of remaining loan amount)||$5,066.25|
What is an annual mortgage insurance premium (MIP)?
In addition to your UFMIP, you’ll also pay annual mortgage insurance premiums (MIP) on an FHA loan. Unlike UFMIP, these premiums are ongoing: you’ll be charged MIP on an annual basis for the life of your loan, but it will be broken into monthly installments that are included in your mortgage payment. With an FHA loan, you’ll pay MIP for the life of the loan—unless you pay 10% or more of your loan at closing, in which case it will be removed after 11 years.
How to calculate MIP
Your MIP payments will be higher when your loan term is longer than 15 years, your loan size is greater than $625,000, and your down payment is less than 5%. Because your MIP depends closely on these three variables, we’ve broken down what you’ll pay in MIP for each scenario below:
MIP percentages for FHA loans longer than 15 years
|Loan amount ||Down payment ||Annual MIP percentage |
|Less than or equal to $625,000||Greater than or equal to 5%||0.80%|
|Less than or equal to $625,000||Less than 5%||0.85%|
|More than $625,000||Greater than or equal to 5%||1.00%|
|More than $625,500||Less than 5%||1.05%|
MIP percentages for 15-year FHA loans (or less)
|Loan amount ||Down payment ||Annual MIP percentage |
|Less than or equal to $625,000||Greater than or equal to 10%||0.45%|
|Less than or equal to $625,000||Less than 10%||0.70%|
|More than $625,000||Greater than or equal to 22%||0.45%|
|More than $625,500||Less than 22%, but greater than or equal to 10%||0.70%|
|More than $625,500||Less than 10%||0.95%|
How to pay the FHA funding fee (FHA mortgage insurance)
You can pay the FHA funding fee (UFMIP) in two ways: upfront in cash at closing or by rolling the cost into your loan.
- One-and-done: Pay 1.75% of your loan amount at closing in cash. This is the most cost-effective way to pay this fee. You’ll avoid paying interest on this cost since you won’t be rolling it into your loan.
- Roll it into your loan: This option slightly increases your monthly mortgage payment and means you’ll pay interest on the UFMIP over time. But it might be ideal if paying the full 1.75% in cash at closing isn’t possible. Most FHA loan borrowers go this route.
As for MIP, you’ll pay your premiums every month with your monthly mortgage payment. Your lender will use one of the percentages in the tables above to calculate your annual MIP. Then, they’ll divide that by 12 to get your monthly premium.
When will my FHA mortgage insurance (MIP) be removed?
Your down payment determines if your FHA lender will eventually cancel your mortgage insurance or not. If you put down at least 10% of your home purchase at closing, your lender will cancel your MIP on your FHA loan after 11 years. For down payments smaller than 10% on FHA loans, you’ll pay MIP for the life of your loan.
Can you avoid paying FHA mortgage insurance?
No, you must pay mortgage insurance on FHA loans. Unlike conventional mortgages, which allow you to bypass private mortgage insurance (PMI) when you pay 20% of your loan at closing, FHA loans don’t have this luxury built into them. That said, there are a few ways to pay less MIP throughout the life of your loan:
- Save a larger down payment: Putting down 10% or more at closing will allow you to cancel your MIP after 11 years.
- Refinance into a conventional mortgage: On a conventional mortgage, you stop paying for mortgage insurance after you’ve paid for 20% of your home’s value. So, if your financial situation has improved and you can qualify for a conventional loan, you could refinance your FHA into a conventional mortgage without mortgage insurance after you’ve paid 20% of your home’s value. You’ll just need to meet basic conventional mortgage requirements, such as a 620 credit score and a DTI ratio of 50% or less.
FAQ about the FHA funding fee
The FHA funding fee is made up of two mortgage insurance costs: first, you’ll pay 1.75% of your loan value (UFMIP) upfront at closing, and then you’ll pay .40–1.05% every year after (MIP). Your MIP will be broken into monthly installments that are added into your mortgage payment.
No, the FHA funding fee is not refundable. The only way to get a refund from your home purchase is to use a home buyer rebate program or refinance your FHA loan into another FHA loan, such as an FHA Cash-Out Refinance or an FHA Streamline Refinance, within three years after closing. Even then, your lender won’t refund you with cash or a check. Rather, the FHA will let you use whatever you’ve paid in UFMIP toward your new loan. So, if you’ve paid $2,000 in UFMIP, you can apply $2,000 against your refinanced mortgage.
FHA closing costs are higher than closing costs on a conventional loan since you have to pay an upfront mortgage insurance premium (UFMIP) at closing, which is 1.75% of the loan amount. You can roll that cost into the loan or pay it in cash at closing.
No, FHA loans will generally cost you more money over time than a conventional loan because of the extra mortgage insurance you’ll have to pay. Mortgage insurance adds up to thousands of extra dollars paid over time on top of your regular principal and interest payments. While FHA loans may occasionally offer lower interest rates than conventional loans and are easier to qualify for, they don’t give borrowers the option of canceling their mortgage insurance unless you make a 10% down payment. Conventional mortgages, on the other hand, do.
Yes, all FHA loans have both an upfront mortgage insurance premium (UFMIP) and annual mortgage insurance premiums (MIP).
Some sellers may be hesitant about FHA loans because the FHA has notoriously strict appraisal guidelines. The FHA wants to be sure the home you’re buying is safe, sound, and secure. To that end, they may require appraisers to check for defects that a conventional lender might not require. FHA lenders may also refuse to lend money if the home’s appraised value is less than the price the seller and buyer agreed on, which means the sale could fall through and the seller would be back to square one.
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