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FHA Mortgage Insurance: Explained

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Mortgages with the Federal Housing Administration (FHA) can be especially attractive to credit-challenged first-time homebuyers. Not only can your down payment be as little as 3.5 percent, but FHA loans also have more lenient credit requirements. Indeed, you can qualify for maximum funding and that low percentage rate with a minimum credit score of 580.

On the negative side, the generous qualifying requirements increase the risk to a lender. That’s where mortgage insurance comes into play.

FHA mortgage insurance (MIP) backs up lenders if you default. It’s the price you pay for getting a mortgage with easier underwriting standards. If you put down 10 percent or more, you’ll pay MIP for 11 years. If you put down less than 10 percent, you’ll pay for MIP for the life of the loan. But there are ways you can get MIP removed or canceled, which we’ll also explain in a bit.

MIP can be bit confusing, so we’ll break down exactly how it works and how much it can add to the cost of a mortgage loan in this post.

Upfront and ongoing MIP: Explained

All FHA borrowers have to pay for mortgage insurance.

MIP is paid upfront, when you close your mortgage loan, as well as through an annual payment that is divided into monthly installments. Not all homebuyers have to pay MIP forever, and we’ll get into those specifics, so hang tight.

When you make your upfront MIP payment, the lender will put those funds into an escrow account and keep them there. If you default, those funds will be used to pay off the lender. As for your ongoing MIP payments, they get tacked onto your monthly mortgage loan payment.

How long you have to pay MIP as part of your mortgage payments can vary based on when the loan was closed, your loan-to-value (LTV) ratio, and the size of your down payment. Your LTV is simply how much your loan balance is, versus the value of your home, which our parent company LendingTree explains in this post.

Upfront Mortgage Insurance Premium (UFMIP)

UFMIP is required to be paid upon closing. It can be paid entirely with cash or rolled into the total amount of the loan. The lender will send the fee to the FHA. The current upfront premium is 1.75 percent of the base loan amount. So, if you borrow a FHA loan valued at $200,000, your upfront mortgage insurance payment would be $3,500 due at closing.

UFMIP is required to be paid by the FHA lender within 10 days of closing. The payment is included in your closing costs or rolled into the loan. A one-time late charge of 4 percent will be levied on all premiums that aren’t paid by lenders within 10 days beyond closing. The lender (not the borrower) must pay the late fee before FHA will endorse the mortgage for insurance.

With ongoing premiums, your lender will collect your MIP and send it to HUD. The lender, not you, be penalized for any late MIP payments.

Annual MIP payments are calculated by loan amount, LTV, and term. To help estimate your cost, the FHA has a great What’s My Payment tool.

Here’s an example of monthly charges based on a $300,000, 30-year loan at 4 percent interest, with a 3.5 percent down payment and an FHA MIP of 0.85 percent. (This does not include any money escrowed for taxes and insurance):

  • Principal and interest: $1,406.30
  • Down payment: $10,500
  • Upfront MIP at 1.75 percent: $5,066
  • Monthly FHA MIP at 0.85 percent: $203.42
  • Total monthly payment = $1,609.72

Penalties and interest charges for late monthly payments are similar to those levied on the UFMIP.

Base Loan Amount

LTV

Annual MIP

Less than or equal to $625,500

≤ 90.00%

0.80%

> 90.00% but
≤ 95.00%

0.80%

> 95.00%

0.85%

Greater than $625,500

≤ 90.00%

1.00%

> 90.00% but
≤ 95.00%

1.00%

> 95.00%

1.00%

Source: HUD

Base Loan Amount

LTV

Annual MIP

Less than or equal to $625,500

≤ 90.00%

0.45%

> 90.00% but
≤ 95.00%

0.70%

Greater than $625,500

> 90.00% but
≤ 95.00%

0.45%

> 95.00%

0.70%

> 90.00%

0.95%

Source: HUD

How long does MIP last?

The length on MIP requirements also depends on when you closed the loan and the size of your down payment. The rules changed dramatically in July 3, 2013. Until then, you could cancel your MIP after your LTV ratio dropped to 78 percent. Under the new rules, the MIP on loans closed after June 3, 2013, will last either the life of the loan or for 11 years, based on the amount of the down payment.

For loans that were closed before June 3, 2013, you can still request that MIP be dropped after your LTV ratio drops to 78 percent — after five years of payments without delinquencies.

Here’s the breakdown:

Loan Term

Original Down Payment

MIP Duration

20, 25, 30 years

Less than 10%

Life of loan

20, 25, 30 years

More than 10%

11 years

15 years or less

Less than 10%

Life of loan

15 years or less

More than 10%

11 years

Source: FHA

 

Loan Term

Original Down Payment

MIP Duration

20, 25, 30 years

Less than 10%

78% LTV based on original purchase price
(5 years minimum)

20, 25, 30 years

10-22%

78% LTV based on original purchase price
(5 years minimum)

20, 25, 30 years

More than 22%

5 years

15 years

Less than 10%

78% LTV

15 years

10-22%

78% LTV

15 years

More than 22%

No MIP

Source: FHA

How to Eliminate MIP

NOTE: About endorsements

According to the MIP Refund Center, the HUD endorsement on FHA loan is the date your MIP is approved. When you pay your upfront MIP with the lender, the loan is closed.The clock starts ticking on your MIP on the endorsement date.

More on MIP cancellation:

Most of today’s FHA borrowers will have but a few options to end their insurance payments. If you’re hoping to get out of paying FHA mortgage insurance, you’re going to either have to pay off the loan or do some refinancing. The FHA policy allowing borrowers to cancel annual MIP after paying for five years and reaching 78 percent LTV was rescinded with the new regulations in 2013 requiring payments for the life of the loan.

The good news about the FHA policy is that you can retire your loan earlier by making additional payments. If you closed your loan after June 2013, you can cancel MIP by refinancing into a conventional loan once you have an LTV of at least 80 percent.

Here are two strategies to get your MIP canceled:

Replace/refinance with a Streamline FHA Mortgage

If you have a current FHA mortgage and have no late payments, you may qualify for a Streamline FHA mortgage to refinance your existing loan with a better rate. You’ll still need to pay MIP but the savings generated by the lower interest rate can offset your insurance costs.

Replace/refinance, with conventional PMI

Want to switch to conventional refinancing? Credit requirements are tougher and interest rates may be higher on conventional PMI. The minimum qualifying credit score for conventional fixed-rate loans is 620.

PMI is similar to MIP in that both protect the lender’s investment. The MIP is determined by the LTV and term. The PMI is calculated on the size of your down payment.

A minimum of 5 percent down is required and the PMI can be paid in a lump sum or monthly installments — not both. If you put down 20 percent or more, the requirement for PMI on conventional financing can be waived. In conventional refinancing, you may be required to have an appraisal to determine property value. This is essential since the PMI insurance requirement on conventional loans ends once the borrower’s LTV drops to 78 percent. The Consumer Financial Protection Bureau says that the lender is required to cancel PMI once your payments reach the “midpoint of your loan’s amortization schedule” — no matter the LTV. That’s if you’re current on your payments.

A good way to determine the value of refinancing is to complete an analysis through LendingTree’s Refinance Calculator.

LEARN MORE:

FHA announcements and changes

HUD announces changes in MIP requirements from time to time in reaction to risks such as foreclosures, deficits in the Mortgage Insurance Fund or downturns in FHA lending.

For example, in January 2015, HUD reduced the annual MIP insurance rate by 50 basis points. Another announcement was released this year after President Trump took office when HUD canceled a plan to lower MIP premiums proposed by the Obama administration. According to the National Association of Realtors, the cancellation of lower rates means “roughly 750,000 to 850,000 homebuyers will face higher costs, and 30,000 to 40,000 new homebuyers will be left on the sidelines in 2017 without the cut.”

Consumers should check with lenders or with HUD to stay up to speed on changes that could affect their mortgage.

Am I eligible for a HUD refund?

If you acquired your loan prior to Sept. 1, 1983, you may be eligible for a refund on a portion of your UFMIP. Or, if you refinance your home with another FHA loan, the insurance refund is applied to your new loan.

HUD rules specify how long you have to refinance before you lose your refund:

  • For any FHA-insured loans with a closing date prior to Jan. 1, 2001, and endorsed before Dec. 8, 2004, no refund is due the homeowner after the end of the seventh year of insurance.
  • For any FHA-insured loans closed on or after Jan. 1, 2001 and endorsed before Dec. 8, 2004, no refund is due the homeowner after the fifth year of insurance.
  • For FHA-insured loans endorsed on or after Dec. 8, 2004, no refund is due the homeowner unless he or she refinanced to a new FHA-insured loan, and no refund is due these homeowners after the third year of insurance.

The refund process goes into motion when the mortgage company reports the termination of your insurance on the loan to HUD. You may receive additional paperwork from HUD or receive a refund directly in the mail. You can find out if you’re owed a refund by entering your information at the HUD refund site. If you’re on the list, call HUD to get the ball rolling at: 1-800-697-6967.

Final thoughts

If you’re trying to get into a home with less-than-optimal credit, an FHA-backed loan could be your best option. You’ll pay for the benefit of landing the mortgage through MIP over much of the loan’s lifetime, if not all of it. You may save money after you’ve built some equity (or improved your credit) by refinancing to a conventional mortgage that drops the mortgage insurance requirement after you reach the 78 percent LTV milestone.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Gabby Hyman
Gabby Hyman |

Gabby Hyman is a writer at MagnifyMoney. You can email Gabby here

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How to Host a Successful Garage Sale

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Whether you’re prepping for a move or finally cleaning out the basement, decluttering your home can bring you peace of mind — and extra cash. Hosting a garage sale is a great way to get rid of old or unused items. Here are a few tips to help you make your sale as profitable as possible.

When is the right time for a garage sale?

Garage sales go by many names — yard sale, moving sale, tag sale, estate sale or rummage sale — but some portion of the event will likely take place outside. If you’re hosting your sale to get rid of stuff before a move, you’ll likely be stuck to a certain date, but if you have some flexibility, consider mild seasons like spring or fall. No one likes rummaging through old items in the blazing August sun, even for good deals.

How to prepare for a yard sale

While the concept of a garage sale is fairly simple, it’s easy to mess up. Many people who host a sale see little success — often because they failed to prepare. Sure, you can just set your unwanted items out on the lawn and have passersby stop and quickly sift through everything. But when you put in a little work ahead of time, the success of your sale is much greater.

“The more preparation that you can do, the more you’ll probably make,” said Ava Seavey, New York-based garage sale expert and author of Ava’s Guide to Garage Sale Gold.

Schedule wisely. First, you’ll want to pick a day for your sale, ideally a Friday or Saturday.  Then you’ll want to take the time to sort through your belongings and carefully select the items you want to sell, choosing items that people will actually find appealing and will want to buy.

Be strategic about prices. Seavey advised that costume jewelry, furniture and collectibles have the potential to make sellers the most money. However, how you price the items is key to ensuring you will earn what these items are worth.

“A good percentage of people who go to garage sales will pay what you have written down,” Seavey said. While some people will negotiate, if your stuff is priced correctly, people will pay it, she said.

Get the word out. You will also want to focus on advertising your sale in your local newspaper and online using garage sale-specific websites and social media channels. Go ahead and describe the types of items you’ll have for sale to attract the right customers.

Be prepared. You’ll want to make sure you have all the supplies you need, including:

  1. Tables
  2. Tablecloths
  3. Pricing labels
  4. Money apron (to hold cash)
  5. Bags
  6. Paper/newspaper (to wrap fragile items)
  7. Signs (to advertise the sale throughout the neighborhood)
  8. Notebook/ledger (to keep track of items sold and money collected)

This may seem like a lot to do in order to sell a few necklaces, purses or electronics. But this preparation can make your sale more appealing and profitable. If having your own sale sounds too time consuming to prepare, you and a friend, family member or neighbor could have the sale together.

What to expect during your garage sale

On the day of the garage sale, you’ll get a variety of customers depending on what you have available for purchase. If you have advertised correctly and have the right things for sale, you could draw in a large crowd.

“I would have plenty of things for everyone. Those are the best sales, when you have a variety,” Seavey said.

Try to keep the sale going from the morning to the late afternoon. Having a sale that lasts a few hours may hinder your ability to make money because you are limiting how many people will be able to come. If your sale starts in the morning and goes until later in afternoon, you can maximize the profits from the sale because those who could not make it during the morning hours can shop in the afternoon before the sale ends.

“There is no magic time to end, but you will do most of your selling in the morning,” Seavey said. “I like to go as long as I can.”

With the money you make from your sale, you can add to or start an emergency fund, pay past-due bills, or even purchase updated items for your new home if you are moving.

What to do after the yard sale

A successful yard sale will leave a lot of money in your pocket and very few unsold items on your lawn. Consider storing your newly acquired cash in an online savings account that earns you interest. If you’re stuck with leftover items, you can always hold another sale, or you can donate them to a charity, church or secondhand store. You won’t make any money when you go this route, but there are benefits to donating.

“You have unloaded everything, you’ve made some money and you have a tax write-off,” Seavey said. “It’s a win-win-win for everybody.”

A garage sale can be the answer when you want to rid yourself of unwanted items — and even make a little money in the process.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Kristina Byas
Kristina Byas |

Kristina Byas is a writer at MagnifyMoney. You can email Kristina here

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What the End of HARP Means for Your Mortgage

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Home values have been on the mend since the financial meltdown of just a decade ago. This has been good news for people who have struggled with negative equity in their homes, meaning the value is lower than the amount they owe on their mortgage.

The percentage of “underwater” homes has dropped significantly, decreasing 16% year over year at the end of 2018 to comprise 4.1% of all mortgaged properties, real estate research firm CoreLogic found. But that means there are still homeowners who need assistance with recovering their equity.A popular government-sponsored refinancing program aimed at helping these homeowners has recently ended, and people looking for help getting above water may not be aware of the other options they have.

In this article, we highlight and explain what the closing of HARP means for homeowners and several available alternatives.

What is HARP?

The Home Affordable Refinance Program, known as HARP for short, is an initiative that helped underwater homeowners refinance their mortgage. The program was introduced in 2009 after the housing crisis.

HARP allowed eligible homeowners to refinance their mortgages to lower their mortgage interest rate or switch from an adjustable-rate to a fixed-rate mortgage even if they were underwater. Typically, lenders will not allow a borrower to refinance if the house is worth less than what is owed.

In order to qualify, homeowners needed to meet the following requirements:

  • No late mortgage payments over the last six months that were 30-plus days behind, and no more than one late payment over the last year.
  • The mortgage you’re attempting to refinance must be for your primary residence, a one-unit second home or a one- to four-unit investment property.
  • Your mortgage must be owned by Fannie Mae or Freddie Mac.
  • Your mortgage was originated on or before May 31, 2009.
  • Your loan-to-value ratio is more than 80%.

The program had been extended a few times, but the last HARP deadline was Dec. 31, 2018.

Fannie and Freddie’s HARP replacements

Government-sponsored enterprises Fannie Mae and Freddie Mac have refinance products in place that are meant to replace HARP.

Fannie Mae’s High Loan-to-Value Refinance Option

Beginning on Nov. 1, 2018, Fannie Mae has offered a high loan-to-value refinance option to borrowers with mortgages owned by the government-sponsored entity. The product is meant to make refinancing possible for borrowers who are maintaining on-time mortgage payments but have an LTV ratio that exceeds the amount allowed for standard refinance options.

Borrowers must benefit from the refinance through a reduction in their monthly principal and interest payment, a lower mortgage interest rate, shorter loan term or by switching to a fixed-rate mortgage. There is no maximum LTV ratio for fixed-rate mortgages; however, the maximum LTV for adjustable-rate mortgages is 105%.

The eligibility requirements include:

  • The loan being refinanced must be an existing Fannie Mae-owned mortgage.
  • The loan must have been originated on or after Oct. 1, 2017.
  • At least 15 months must pass between the loan origination of the existing mortgage and the refinanced mortgage.
  • Borrowers must be current on their mortgage, have no late payments over the last six months and only one 30-day delinquency over the last 12 months. Delinquencies longer than 30 days aren’t permitted.
  • The existing mortgage can’t be a Fannie Mae DU Refi Plus or Fannie Mae Refi Plus mortgage.

Freddie Mac’s Enhanced Relief Refinance Mortgage

Freddie Mac offers the Enhanced Relief Refinance mortgage to borrowers who are current on their mortgage but can’t qualify for a standard refinance because of a high LTV ratio. The mortgage being refinanced must meet the following requirements:

  • The mortgage must be owned or securitized by Freddie Mac.
  • The mortgage can’t have any 30-day delinquencies over the past six months and only one 30-day delinquency in the last year.
  • The closing date for the mortgage was on or after Oct. 1, 2017.
  • The mortgage can’t already be a Relief Refinance mortgage.
  • There should be at least 15 months between when the original loan was closed and the refinanced loan’s origination.
  • The loan can’t be subject to an outstanding repurchase request.
  • The maximum loan-to-value ratio for adjustable-rate mortgages is 105% and there’s no max for fixed-rate mortgages.

Borrower benefits include a lower interest rate, switching from an adjustable-rate to fixed-rate mortgage, shorter mortgage term or lower monthly principal and interest payment.

Alternatives to refinancing when you’re underwater

If refinancing your mortgage doesn’t sound like the best move for you, consider one of the following alternatives.

Mortgage modification

A mortgage modification is a way to change the original terms of your loan without going through the refinancing process. In some cases, you can work with your lender to switch from an adjustable-rate to a fixed-rate mortgage, extend your loan term, lower your interest rate or add past-due amounts to your unpaid principal balance.

Modifying a mortgage could be beneficial for homeowners facing hardship who aren’t eligible to refinance and are delinquent on their mortgage payments or expect they will eventually fall behind.

Mortgage recasting

If you have a lump sum of at least $5,000 in cash, you could potentially recast your mortgage. A mortgage recasting results in lower monthly mortgage payments. You pay a lump sum of cash to your lender to reduce your outstanding loan principal amount, then your loan is reamortized based on the lower remaining principal balance. Your interest rate and loan term stay the same.

This option makes sense if you’re expecting a bonus from your employer, a large income tax refund or some other financial windfall.

The bottom line

Although HARP has come to an end, there are still options for mortgage borrowers with Fannie- or Freddie-owned loans. In order to qualify for the enterprises’ refinancing programs, it’s helpful to maintain on-time payments even when your loan amount exceeds your home’s value.

If you don’t qualify, be sure to strategize on how best to attack your mortgage balance and rebuild equity. Consider making extra mortgage payments whenever possible by freeing up room in your budget, earning extra income or dedicating unexpected money to your mission.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Crissinda Ponder
Crissinda Ponder |

Crissinda Ponder is a writer at MagnifyMoney. You can email Crissinda here

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