How Is Mortgage Insurance Premium (MIP) Calculated?

Mortgage Insurance Premium (MIP) represents an additional expense for homeowners utilizing loans insured by the Federal Housing Administration (FHA). This fee is primarily associated with FHA loans, which are government-backed mortgages designed to make homeownership more accessible, particularly for individuals who might not qualify for conventional loans due to lower credit scores or smaller down payments. The fundamental purpose of MIP is to protect lenders against financial losses should a borrower default on their mortgage obligations. This insurance mechanism helps mitigate the risk for lenders, encouraging them to extend financing to a broader range of homebuyers.

Understanding Mortgage Insurance Premium Types

FHA mortgage insurance premiums consist of two distinct components, each with its own structure and payment schedule. These are the Upfront Mortgage Insurance Premium (UFMIP) and the Annual Mortgage Insurance Premium (AMIP). The Upfront Mortgage Insurance Premium (UFMIP) is a one-time charge collected at the time of the loan closing. Conversely, the Annual Mortgage Insurance Premium (AMIP) represents an ongoing charge that borrowers pay over a period, typically on a monthly basis as part of their regular mortgage payments. While both serve the same overarching goal of protecting the lender, their payment mechanics differ significantly.

Calculating Upfront Mortgage Insurance Premium

The Upfront Mortgage Insurance Premium (UFMIP) is a fixed percentage of the base loan amount. As of 2025, the standard UFMIP rate is 1.75% of the total loan amount. Borrowers typically pay the UFMIP in one of two ways: either as a lump sum at the loan closing, which is added to the closing costs, or by financing it into the overall loan amount.

Choosing to finance the UFMIP means the amount is added to the principal balance, and borrowers will pay interest on this financed portion over the life of the loan. For example, if a borrower secures an FHA loan for $300,000, the UFMIP would be calculated as $300,000 multiplied by 1.75%, resulting in $5,250. If this amount is financed, the borrower’s total loan amount would become $305,250. This upfront charge is a mandatory component of nearly all FHA loans, regardless of the borrower’s down payment amount or credit score.

Calculating Annual Mortgage Insurance Premium

The Annual Mortgage Insurance Premium (AMIP) is an ongoing cost calculated annually, based on the outstanding loan balance. This annual amount is then divided into 12 equal monthly installments, which are added to the borrower’s regular mortgage payment. The specific AMIP rate, which ranges from 0.15% to 0.75% as of 2025, depends on two primary factors: the loan term and the loan-to-value (LTV) ratio at the time of loan origination.

Different rates apply based on whether the loan term is 15 years or less, or longer than 15 years (such as a 30-year loan). Additionally, the LTV ratio, which compares the loan amount to the home’s value, influences the rate; for instance, loans with an LTV of 90% or less may have a different rate than those with an LTV exceeding 90%. As the loan balance decreases over time with each monthly payment, the actual dollar amount of the AMIP paid also gradually reduces, because the percentage is applied to the declining outstanding principal balance.

Consider an example of a $300,000 FHA loan with a 30-year term and an LTV greater than 90%, where the annual MIP rate is 0.55%. In the first year, the annual premium would be $300,000 multiplied by 0.55%, equaling $1,650. This annual figure is then divided by 12, resulting in a monthly AMIP payment of $137.50, which is added to the borrower’s regular mortgage payment.

How Long Mortgage Insurance Premium is Paid

The duration for which FHA borrowers are required to pay the Annual Mortgage Insurance Premium (AMIP) is determined by the original Loan-to-Value (LTV) ratio at the time the loan was originated. For FHA loans where the original LTV was 90% or less, meaning the borrower made a down payment of 10% or more, the AMIP is typically paid for 11 years.

However, if the original LTV was greater than 90%, which means the borrower made a down payment of less than 10%, the AMIP is generally required for the entire loan term. A common strategy for borrowers to eliminate the Annual Mortgage Insurance Premium, particularly for those who would otherwise pay it for the entire loan term, is to refinance their FHA loan into a conventional mortgage. This option becomes viable once a borrower has built sufficient equity in their home, typically reaching at least 20% equity, as conventional loans generally do not require mortgage insurance once this threshold is met.