Up-Front Mortgage Insurance (UFMI)

What Is Up-Front Mortgage Insurance (UFMI)?

Up-front mortgage insurance is an insurance premium that is collected, typically on Federal Housing Administration (FHA) loans, at the time the loan is initially made. Though similar, it is not quite the same as private mortgage insurance (PMI), which is collected by a conventional private mortgage lender each month when a buyer's down payment on a home is less than 20% of the purchase price. Up-front mortgage premiums are added to a pool of money that is used to help entities, such as the FHA, insure loans for certain borrowers.

Understanding Up-Front 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) that the borrower will default is higher, because the borrower doesn't have as much to lose by walking away and letting the bank foreclose. With mortgage insurance, if you stop making your mortgage payments and walk away from your home, the insurer will help your lender recoup its losses.

FHA loans have lower down-payment requirements — as low as 3.5% of a home's price tag — and less stringent income and credit requirements than conventional loans. So these loans require the payment of up-front mortgage insurance, which is collected at the time of closing.

Since 2015, the rate for up-front mortgage insurance has been 1.75% of the base loan price. FHA Streamline refinance loans are charged a UFMIP of 0.55%. You have the option to pay this amount in cash when you close your loan, but most people choose to roll it into their total mortgage amount.

If you can afford to pay the amount of up-front mortgage insurance (UFMI) at the outset, it's a good idea to do so. If you decide to roll it into your loan, it will be a lot more expensive in the long run.

In addition to the UFMI, borrowers have to pay ongoing mortgage insurance premiums (MIP), which range from 0.45% to 1.05% of the total mortgage. You'll have to pay this mortgage insurance until your loan-to-value ratio is high enough — that is, until you have paid off a certain amount of your mortgage. When your equity is high enough (in the case of an FHA loan, the percentage is 22% ), there is less risk for the lender should you walk away from the loan. At this time, the insurance is no longer required. Those with loans greater than 15 years are required to make monthly mortgage insurance payments for five years. If your mortgage is shorter than 15 years, then the only requirement is the 78% loan-to-value ratio.

Up-front mortgage insurance premium payments are submitted directly to the U.S. Department of Housing and Urban Development (HUD) and collected by the U.S. Department of the Treasury's automated collection service. They go into an escrow account.

HUD uses a secure Internet collection portal to process collections electronically. This automated collection service:

Special Considerations

Many people do not realize that premiums for up-front mortgage insurance can usually be refunded on a pro-rated basis if they paid it all at once, 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 the fact.

If a homeowner received their FHA loan before June 2013, they are eligible for a refund and cancelation of their up-front mortgage insurance premium after five years. A homeowner must have 22% equity in the property, and all payments must have been made on time. Homeowners with FHA loans issued after June 2013 must refinance into a conventional loan and have a current loan-to-value of at 80% or more.

Tips to Avoid Paying Up-Front Mortgage Insurance (UFMI)

There are a few ways home buyers can avoid paying upfront mortgage insurance: