What Is Up-Front Mortgage Insurance (UFMI)?
Up-front mortgage insurance is an insurance premium that is collected, typically on Federal Housing Administration (FHA) loans, at the time the loan is initially made. Though similar, it is not quite the same as private mortgage insurance (PMI), which is collected by a conventional private mortgage lender each month when a buyer's down payment on a home is less than 20% of the purchase price. Up-front mortgage premiums are added to a pool of money that is used to help entities, such as the FHA, insure loans for certain borrowers.
- Up-front mortgage insurance (UFMI) is an additional insurance premium of 1.75% that is collected on Federal Housing Administration (FHA) loans.
- This insurance money protects the lender in case the borrower defaults on his mortgage payments.
- UFMI can be paid at the time the loan closes or rolled into the mortgage payments. It is in addition to ongoing mortgage insurance premium payments.
Understanding Up-Front Mortgage Insurance (UFMI)
Like PMI, the purpose of FHA mortgage insurance is to protect the lender. When borrowers have minimal equity in their homes, the risk (to the lender) that the borrower will default is higher, because the borrower doesn't have as much to lose by walking away and letting the bank foreclose. With mortgage insurance, if you stop making your mortgage payments and walk away from your home, the insurer will help your lender recoup its losses.
FHA loans have lower down-payment requirements—as low as 3.5% of a home's price tag— and less stringent income and credit requirements than conventional loans. So these loans require the payment of up-front mortgage insurance, which is collected at the time of closing.
Since 2015, the rate for up-front mortgage insurance has been 1.75% of the base loan price. FHA Streamline refinance loans are charged a UFMIP of 0.55%. You have the option to pay this amount in cash when you close your loan, but most people choose to roll it into their total mortgage amount.
If you can afford to pay the amount of up-front mortgage insurance (UFMI) at the outset, it's a good idea to do so. If you decide to roll it into your loan, it will be a lot more expensive in the long run.
In addition to the UFMI, borrowers have to pay ongoing mortgage insurance premiums (MIP), which range from 0.45% to 1.05% of the total mortgage. You'll have to pay this mortgage insurance until your loan-to-value ratio is high enough—that is, until you have paid off a certain amount of your mortgage. When your equity is high enough (in the case of an FHA loan, the percentage is 22% ), there is less risk for the lender should you walk away from the loan. At this time, the insurance is no longer required. Those with loans greater than 15 years are required to make monthly mortgage insurance payments for five years. If your mortgage is shorter than 15 years, then the only requirement is the 78% loan-to-value ratio.
Up-front mortgage insurance premium payments are submitted directly to the U.S. Department of Housing and Urban Development (HUD) and collected by the U.S. Department of the Treasury's automated collection service. They go into an escrow account.
HUD uses a secure Internet collection portal to process collections electronically. This automated collection service:
- Satisfies agency and business partner demands for electronic alternatives by providing the ability to complete forms, make payments, and submit queries electronically via the Internet.
- Enables business partners and consumer users to access their payment accounts from any computer with Internet access.
- Enables federal agencies to obtain and process collections in an efficient and timely manner
Many people do not realize that premiums for up-front mortgage insurance can usually be refunded on a pro-rated basis if they paid it all at once, and then sell their home within the first five to seven years of ownership. In other words, they may be entitled to a substantial refund even years after the fact.
If a homeowner received their FHA loan before June 2013, they are eligible for a refund and cancelation of their up-front mortgage insurance premium after five years. A homeowner must have 22% equity in the property, and all payments must have been made on time. Homeowners with FHA loans issued after June 2013 must refinance into a conventional loan and have a current loan-to-value of at 80% or more.
Tips to Avoid Paying Up-Front Mortgage Insurance (UFMI)
There are a few ways home buyers can avoid paying upfront mortgage insurance:
- Apply for a conventional mortgage loan. Mortgage lenders will not require upfront mortgage insurance for conventional loans that have an 80% loan to value or less. This threshold applies to both original home purchases and refinancing.
- Make a 20% down payment. A mortgage lender will not shoulder as much risk when a down payment for a home is equal to 20% or more; therefore, a homebuyer is not expected to pay for mortgage insurance.
- Get a second mortgage. A 5% down payment would require a 15% second mortgage, and a 10% down payment would require a 10% second mortgage, to account for the 20% that is needed to avoid mortgage insurance.
- Get help from the seller. A seller who has equity may opt to finance a portion of the purchase price, via a second mortgage. Your 10% down payment that is coupled with the seller’s 10% second mortgage will help you avoid mortgage insurance.