On FHA loan, Mortgage Insurance is charged as against PMI which is charged on conventional mortgage.In FHA loans, the borrower will be charged a mortgage insurance premium equal to 1.50% of the purchase price of the property and a renewal premium of 0.500% in subsequent years. The mortgage insurance premium paid on an FHA loan is always significantly higher than on a conventional program. Those premiums protect the mortgage lender in case of default by the homeowner.
The U.S. Department of Housing and Urban Development (HUD) requires an upfront PMI premium of 2.25 percent of the total loan amount, due at loan closing. You will continue to pay a monthly PMI premium along with your scheduled principal and interest on the loan until you achieve 20 percent equity in your home.
Compute the Average Annual Outstanding Balance:
- Multiply the original loan amount by the interest rate on the loan. Use the interest rate as a whole number; do not convert the interest rate to a decimal.
- Divide the result of the calculation in Step 1 by 1,200.
- Add the amount calculated in Step 2 to the original loan amount.
- Subtract the total monthly principle and interest payment on the loan from the total derived in Step 3 to obtain the new outstanding balance on the loan after the first month’s payment on the loan.
- Repeat the above process again using the remaining outstanding loan balance derived in Step 4 until you have obtained 11 months of calculations.
- Add the remaining outstanding balance for each month plus the original loan amount together to obtain a total of 12 months of outstanding balances on the loan.
- Divide the 12-month outstanding balance total by 12 to obtain an average outstanding balance on the loan. This is your average outstanding loan balance for the year.
Calculating Monthly PMI:
- Multiply the average outstanding loan balance for the year by 0.005, the annual PMI rate set forth by the Department of Housing and Urban Development.
- Divide the total derived in Step 1 by 1.0225 to adjust for the upfront PMI payment made when you originated the loan.
- Divide the annual PMI premium amount calculated in Step 2 by 12 to determine the monthly PMI charge.