What Are Mips, or Mortgage Insurance Premiums?

MIP, also known as FHA mortgage insurance, is required of borrowers who take out an FHA mortgage loan.

MIP protects FHA-backed lenders in the case that the borrower is unable to pay back the loan. It is required for all FHA loans, regardless of the applicant’s credit score or down payment.

What is an FHA loan?

The FHA does not make direct loans. It aids private lenders who provide mortgage loans.

Thanks to FHA-backed loans, consumers can buy a home even if they might have trouble getting a traditional loan. FHA loans frequently have more lenient credit and down payment requirements than conventional mortgage loans.

The U.S. Department of Housing and Urban Development states that borrowers who put down at least 10% of the total cost of a home purchase and have credit scores below 500 may qualify for an FHA loan. Borrowers with credit scores of at least 580 may also be allowed for loans with down payments as low as 3.5%.

What is the price of FHA mortgage insurance?

All FHA loans currently have an upfront cost of 1.75 percent of the total loan amount.

Considering this, the initial cost for a borrower who secures a $200,000 FHA mortgage loan would be $3,500. The initial payment is either rolled into the mortgage and paid down monthly or paid in full with closing costs, which is vital to remember.

The annual premium equals 0.45% to 1.05% of the outstanding loan balance. The three factors that affect this are the loan amount, loan-to-value (LTV) ratio, and mortgage term.

The loan amount is the total amount borrowed. The loan amount is compared to the asset being purchased, in this case, the home, using the LTV ratio. The mortgage term determines how long the borrower must repay the loan. As per the Consumer Financial Protection Bureau (CFPB), most mortgages last 15, 20, or 30 years.

The annual premium is calculated, split by 12, and repaid monthly. Since it is often included in the monthly mortgage payment, keeping track of a separate charge is unnecessary.

Can the cost of mortgage insurance be deducted from an FHA loan?

Whether a borrower can get rid of the annual MIP from an FHA-backed loan depends on several factors, including the origination date of the loan, the LTV ratio, the down payment size, and the mortgage lender’s rules.

If a loan was created before December 31, 2000, borrowers might be unable to cancel their mortgage insurance at any point throughout the loan’s term.

Borrowers who have paid at least 78% of the loan’s LTV on loans made between December 31, 2000, and June 3, 2013, may speak with the lender about cancelling their mortgage insurance.

For loans made after June 3, 2013, borrowers with down payments of less than 10% of the purchase price may only be eligible for mortgage insurance cancellation at any point during the loan’s life if the term is greater than 30 years. Borrowers who made down payments of 10% or more may be eligible for cancellation after 11 years.

Remember that the FHA does not make loans; instead, it supports private lenders. Additionally, the rules and requirements for cancelling mortgage insurance may vary depending on the lender. Therefore, you should chat with lenders directly if you want further information.

Tax Effects of Qualified Mortgage Insurance Premium

Before the 2017 Tax Cut and Jobs Act, mortgage insurance payments were additionally deductible in addition to eligible mortgage interest. The Further Consolidated Appropriations Act of 2020 allowed MIP and private mortgage insurance (PMI) tax deductions for 2020 and retroactively for 2018 and 2019.

Due to the Act’s expiration, mortgage insurance premiums are no longer deductible.

Your lender must send Form 1098, Mortgage Interest Statement, to you and the Internal Revenue Service (IRS). Your annual mortgage payments are broken down in this document, which may have tax ramifications. The total of the MIP or PMI premium payments should be included in box 5 of the form. You must itemize your deductions on Schedule A in the interest paid section if you want to deduct these premiums from your taxes for 2018, 2019, or 2020.

In conclusion, to get an FHA loan, be prepared to pay mortgage insurance fees. Even if you can shorten the amount of time, you must pay MIP, depending on the size of your down payment, it may be beneficial to incorporate MIP in your mortgage payment calculation for at least 11 years if not the whole loan term.

Even so, borrowers with lower credit scores or smaller down payments might still find that FHA loans are the better option. Consult your accountant or financial advisor when comparing house loans to determine which is best for you.