What Is Up-Front Mortgage Insurance (UFMI)?
Let me explain up-front mortgage insurance to you directly: it's an insurance premium collected right when the loan starts, usually on Federal Housing Administration (FHA) loans. It's not exactly like private mortgage insurance (PMI), which private lenders collect monthly if your down payment is under 20% of the home's price. These up-front premiums go into a pool that helps organizations like the FHA insure loans for specific borrowers.
Key Takeaways
Here's what you need to know: Up-front mortgage insurance (UFMI) is an extra 1.75% premium on FHA loans. This money safeguards the lender if you default on payments. You can pay it at closing or add it to your mortgage, and it's separate from the ongoing insurance premiums.
Understanding Up-Front Mortgage Insurance (UFMI)
Just like PMI, FHA mortgage insurance exists to protect the lender. If you have little equity in your home, the risk of default is higher since you have less to lose by walking away. With this insurance, if you stop payments and abandon the home, the insurer covers the lender's losses.
FHA loans allow down payments as low as 3.5% and have easier income and credit rules than conventional loans, so they require this up-front insurance collected at closing. The rate is 1.75% of the base loan amount, or 0.55% for FHA Streamline refinances. You can pay it in cash at closing, but most people roll it into the mortgage.
If you can afford to pay the UFMI upfront, I recommend you do it—rolling it in makes it cost more over time due to interest. Besides UFMI, you'll pay ongoing mortgage insurance premiums (MIP) from 0.45% to 1.05% of the loan. These continue until your loan-to-value ratio drops low enough, meaning you've built 22% equity for FHA loans. For loans over 15 years, you pay MIP for at least five years; shorter loans just need the 78% LTV.
These premiums go straight to the U.S. Department of Housing and Urban Development (HUD) via the Treasury's automated service into an escrow account. HUD's secure portal lets you handle forms, payments, and queries online from any computer, making collections efficient for agencies.
Special Considerations
Many don't realize this, but if you pay UFMI all at once and sell your home within five to seven years, you can often get a pro-rated refund—even years later. For FHA loans before June 2013, you're eligible for a refund and cancellation after five years with 22% equity and on-time payments. For loans after June 2013, you need to refinance to a conventional loan with 80% or better LTV.
Tips to Avoid Paying Up-Front Mortgage Insurance (UFMI)
- Go for a conventional mortgage: Lenders skip upfront insurance if your LTV is 80% or less, for purchases or refinances.
- Put down 20%: With that much down, the lender's risk drops, so no mortgage insurance is needed.
- Add a second mortgage: A 5% down payment pairs with a 15% second mortgage, or 10% down with 10% second, to hit the 20% threshold.
- Get seller help: If the seller has equity, they might finance part via a second mortgage—your 10% down plus their 10% avoids insurance.
Is UFMI Refundable?
Generally, the UFMI premium isn't refundable, except if you're refinancing to a new FHA mortgage within three years of the original.
How Is the FHA UFMI Premium Calculated?
It's straightforward: FHA charges 1.75% of the loan amount. For a $300,000 loan, that's $5,250, making the total mortgage $305,250 if financed in.
Can the UFMI Be Paid in Cash, or Can It Be Financed Into the Loan Payments?
You can pay it in cash or finance it into the loan, but it has to be all one way—no splitting. Cash payments add to your closing costs.
The Bottom Line
Up-front mortgage insurance is an extra fee on FHA loans to fund programs like homebuyer assistance. You usually pay it for these loans, but skip it with at least 25% down or by choosing a conventional mortgage.
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