There are two different types of mortgage insurance. The first is government insurance, which is on every government loan (FHA mortgage). The other is private mortgage insurance. Private mortgage insurance is required on conventional mortgage products where the loan-to-value exceeds 80% or in other words, when the down payment on a home purchase is less than 20% of the sales price.
GOVERNMENT MORTGAGE INSURANCE (MIP) FHA mortgages are mortgages made by a lender where the Federal Housing Administration (FHA) insures the mortgage. If a borrower were to go into foreclosure on their FHA mortgage , the FHA would step in and pay the lender a certain amount for the property and then turn around sell it in their HUD Homes program.
This mortgage insurance is paid for by the borrower. On an FHA loan there is an up front fee of 2.25% of the loan amount. This up front fee is added to the loan amount and financed right along with the mortgage. In other words, you are paying interest on this amount also. In addition to the up front fee, there is a monthly amount charged. This monthly fee is calculated by taking the base loan amount multiplied by .50% and divided by twelve months. The base loan amount can be a complex calculation with many different factors determining which formula to use. For purposes of this discussion, I will keep it simple and say that the base loan amount is $100,000. The following is an example of how these calculations can end up affecting your monthly payment when your base loan amount is $100,000.
Up front mortgage insurance calculation: $100,000 X 2.25% = $2,250 Final loan amount = $102,250
Monthly mortgage insurance calculation: $100,000 X .50% = $500 $500 / 12 months = $41.67 Amount added to each monthly payment = $41.67
If you pay off the FHA mortgage, the up front mortgage insurance is prorated for the length of the loan and a refund is granted to you (another complicated formula that I won't get into). Many consumers don't realize this and never inquire when they have an FHA mortgage paid. The government has a list of tens of thousands of consumers who never claimed their MIP refunds.
