Q: How much should I expect to pay in mortgage insurance on an FHA loan?
A: The answer depends on the size of your loan - both in dollar terms and relative to the value of your house.
FHA insurance premiums on a 30-year home loans can range between 80 and 105 basis points.
Two mortgage riskiness factors are:
- Loan size. FHA insurance premiums are higher on loans of $625,500 or more
- The percentage of a property's value represented by the loan. Insurance premiums are generally higher on loans that represent more than 95 percent of the property's value.
The lowest FHA insurance premium on a 30-year mortgage approximates 80 basis points on a loan of less than $625,500, if that loan is 95 percent or less of the property's value. That premium rises to 85 basis points if the loan is less than $625,500 but represents more than 95 percent of the property's value.
On larger loans (i.e., those in excess of $625,500) the mortgage insurance premium is 100 basis points if the loan is 95 percent or less of the property's value, and 105 basis points if the loan is more than 95 percent of the property's value.
Mortgage insurance premiums tend to be sensitive to mortgage default rates. As long as default rates are fairly low, the FHA should be able to keep mortgage insurance premiums down. However, if default rates spike, as they did during the housing crisis, the FHA could be forced to raise premiums for new borrowers.
After you become a home owner, as you build more equity and establish a longer credit history over time, you should be alert for opportunities to refinance out of your FHA loan, because that may enable you to eliminate mortgage insurance premiums.