Up-Front Mortgage Insurance (UFMI)

Posted on by user

Up-Front Mortgage Insurance (UFMI)

What UFMI Is

Up-Front Mortgage Insurance (UFMI), often called the UFMIP (Up-Front Mortgage Insurance Premium), is a one-time insurance premium charged on Federal Housing Administration (FHA) loans. Its purpose is to protect the lender (and the FHA program) if a borrower defaults. UFMI is collected at loan origination and can either be paid in cash at closing or rolled into the loan principal.

How UFMI Works

  • Rate: The standard UFMIP on most FHA loans is 1.75% of the base loan amount. (FHA streamline refinances are commonly charged a lower UFMIP, such as 0.55%.)
  • Payment options: You may pay the UFMIP in cash at closing or finance it as part of the loan balance. It must be paid fully one way or the other (cannot be split).
  • Effect on loan: If financed, the UFMIP increases your loan principal and the interest charged on that larger balance.
  • Example: On a $300,000 loan, 1.75% UFMIP = $5,250, raising the financed balance to $305,250.

Ongoing Mortgage Insurance (MIP)

In addition to the up-front premium, FHA loans require ongoing monthly mortgage insurance premiums (MIP). Typical MIP ranges from about 0.45% to 1.05% of the mortgage annually (paid monthly). Duration of MIP depends on loan term and original LTV:
* For loans with terms greater than 15 years: MIP is required for at least five years.
* For loans with terms 15 years or shorter: MIP generally remains until the loan-to-value (LTV) reaches about 78% (i.e., borrower has 22% equity).

Refunds and Special Considerations

Refund and cancellation rules for UFMIP and MIP vary by origination date and action taken later:
* Pro-rated refunds: If you paid UFMIP in cash and sell or refinance within a limited time, you may be eligible for a pro-rated refund of the unused portion—often on a five- to seven-year schedule depending on the circumstances.
* Loans originated before June 2013: Borrowers may be eligible for refund and cancellation of certain mortgage insurance charges after meeting conditions such as reaching 22% equity and keeping payments current for five years.
* Loans originated after June 2013: Cancellation options are more limited. Typical paths to stop FHA mortgage insurance include refinancing into a conventional loan when your LTV is 80% or lower.
* Refinances: In some situations (for example, certain FHA-to-FHA refinances), a partial refund or different UFMIP treatment can apply if the new FHA-insured mortgage occurs within a short period of the original loan.

Ways to Avoid Up-Front Mortgage Insurance

  • Conventional loan with ≥20% down: Conventional mortgages with an 80% LTV or better typically do not require mortgage insurance.
  • Make a 20% (or more) down payment: A larger down payment reduces lender risk and eliminates the need for mortgage insurance on conventional loans.
  • Use a second mortgage (piggyback): Pairing a first mortgage with a second loan to reach a combined 80% LTV can avoid mortgage insurance, though this adds complexity and cost.
  • Seller concessions: In some cases the seller may finance a portion of the purchase via a second mortgage to help you avoid mortgage insurance.

Key Takeaways

  • UFMI/UFMIP is a one-time FHA insurance charge (commonly 1.75%) collected at loan origination.
  • It protects the lender and can be paid in cash or rolled into the loan principal.
  • FHA loans also require monthly MIP, with duration rules that depend on loan term and origination details.
  • Refunds or cancellation of mortgage insurance depend on origination date, loan-to-value, refinancing choices, and other conditions.
  • To avoid paying UFMI, consider a conventional loan with sufficient down payment, or strategies like piggyback loans or seller-financed seconds.

Bottom Line

UFMI is an expected cost of FHA financing that helps make low-down-payment mortgages possible by reducing lender risk. Understand how it is calculated, how it affects your loan balance, and the options for avoiding or discontinuing mortgage insurance when planning your home purchase or refinance.