What is Advance Mortgage Insurance (FMI)?
Advance mortgage insurance is an insurance premium that is generally charged on Federal Housing Administration (FHA) loans at the time the loan is originally made. Although similar, it is not exactly the same as Private Mortgage Insurance (PMI), which is charged by a conventional private mortgage lender each month when a homeowner’s down payment is less than 20% of the purchase price. Prepaid mortgages are added to a pool of money that is used to help entities, such as the FHA, obtain loans for certain borrowers.
- Advance Mortgage Insurance (UFMI) is an additional insurance premium of 1.75% charged on Federal Housing Administration (FHA) loans.
- This insurance money protects the lender in the event that the borrower defaults on their mortgage payments.
- The UFMI can be paid at the time of closing the loan or included in the mortgage payments. It is in addition to ongoing mortgage insurance premium payments.
Understanding of Advance 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) of the borrower defaulting is higher, because the borrower doesn’t have much to lose by walking away and letting the bank enforce it. With mortgage insurance, if you stop making your mortgage payments and move out, the insurer will help your lender recover its losses.
FHA loans have lower down payment requirements (up to 3.5% of home price) and less stringent income and credit requirements than conventional loans.AThus, these loans require the payment of mortgage insurance in advance, which is collected at the time of closing.
Since 2015, the initial mortgage insurance rate is 1.75% of the basic price of the loan. FHA Streamline refinance loans are loaded with a 0.55% UFMIP.AYou have the option of paying this amount in cash when you close the loan, but most people choose to roll it over into the full mortgage amount.
If you can pay your mortgage (UFMI) in advance, it is a good idea to do so. If you decide to include it in your loan, it will be much more expensive in the long run.
In addition to the UFMI, borrowers must pay mortgage insurance premiums (MIP), which range between 0.45% and 1.05% of the total mortgage loan.AYou will have to pay off this mortgage until your loan-to-value ratio is high enough, that is, until you pay off a certain amount of the mortgage loan. When the principal is large enough (in the case of an FHA loan, the percentage is 22%A), there is less risk for the lender if you forgo the loan. At this point, insurance is no longer required. Those with loans older than 15 years must make monthly mortgage payments for five years. If your mortgage is less than 15 years old, then the only requirement is a 78% loan-to-value ratio.
Initial payments for mortgage insurance premiums are sent directly to the US Department of Housing and Urban Development (HUD) and collected by the US Department of the Treasury’s automated collection service. escrow account.AA
HUD uses a secure online collection portal to process collections electronically. This automatic collection service:
- Fulfills agency and business partner requests for electronic alternatives, providing the ability to complete forms, make payments, and submit inquiries electronically over the Internet.
- It allows business partners and consumers to access their payment accounts from any computer with Internet access.
- Enables federal agencies to collect and process collections in an efficient and timely manner
Many people don’t realize that the initial mortgage insurance premiums can usually be paid on a prorated basis if they’ve paid it all off 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 that.
If a homeowner received an FHA loan before June 2013, they are eligible for a refund and early mortgage insurance premium cancellation after five years. An owner must own 22% equity and all payments must have been made on time.AHomeowners with FHA loans made after June 2013 must refinance to a conventional loan and have a current loan value of 80% or more.
Tips to Avoid Advance Mortgage Insurance (UFMI)
There are several ways homeowners can avoid paying for their mortgage insurance up front:
- Apply for a conventional mortgage. Mortgages will not require advance mortgage insurance for conventional loans that are 80% or less borrowed. This threshold applies to both initial home purchases and refinancing.
- Make a 20% deposit. A mortgagee will not be at such a high risk when a down payment on a home is 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 represent the 20% needed to avoid mortgage insurance.
- Get help from the seller. A seller with equity may choose to finance part of the purchase price through a second mortgage. The 10% down payment combined with the seller’s 10% second mortgage will help you avoid mortgage insurance.