Understanding FHA Mortgage Insurance Premiums (MIP) and (UFMIP) for Streamline Refinances

The Federal Housing Administration (FHA) operates based on a balance sheet just like any other business or government agency.  On October 4, 2010 FHA made substantial changes to it's insurance premiums which have a significant effect on their Streamline Refinance program.

On loans with case#s issued prior to October 4, 2010 borrowers will pay an Up-Front Mortgage Insurance Premium (UFMIP) of 2.25% plus a Monthly Insurance Premium (MIP) of 0.5%.

EXAMPLE of Streamline before 10/4/10

Payoff = $200,000

UFMIP = $4500.00 (2.25%)

MIP = $85.20 (0.5%)

New Loan Amount = $204,500@4.5% fixed

PI + MIP = $1121.37

EXAMPLE of Streamline after 10/4/10

Payoff = $200,000

UFMIP = $2000 (1.00%)

MIP = $185.16 (1.10%)

New Loan Amount = $202,000@4.5% fixed

PI + MIP = $1208.66

From the above example, you can see that the monthly payment is now $87.29 higher.  That extra money is being collected to compensate for the UFMIP reduction of $2500. 

These changes discourage people from using the FHA streamline product to help them save money monthly.  Based on today's rates the 30yr fixed rate is at 4.25%.  The problem is that most people who have 5-5.5% can hardly save money due to the monthly increases.

It's a shame that FHA made these changes, but at the same time we are fortunate that fixed rates are at such a low point.  On a positive note, the MIP does drop off from the total monthly payments once the existing loan balance reaches 78% of the appraisal value on record (last FHA appraisal done).  So at least FHA borrowers who do want to take advantage of lower rates offered now, they can expect a healthy reduction later on when the MIP drops off.