FHA loans are a crucial component of the country's nascent housing recovery. If you're finding it difficult to keep up with your monthly mortgage payments and worry that you might lose your house as a result, an FHA refinancing loan may be able to buy you valuable time and reduce the effective cost of your mortgage. Depending upon the size or your mortgage and its date of origination, these loans may lower its interest rate by several points.
Unfortunately, most FHA refinancing loans will require you to make an upfront mortgage insurance payment. In accounting parlance, this is known as a UFMIP. It's currently valued at 1.75 percent of the total initial mortgage balance. You'll also be responsible for paying an ongoing mortgage insurance premium on a monthly basis. Known as the MIP, this premium is recalculated each year and is currently equal to 1.25 percent of the total balance.
Fortunately, you may be eligible for a discount on the UFMIP payment for your refinancing loan. The FHA calculates these discounts based on several criteria, including the balance of your refinancing loan and the number of months remaining on your original mortgage.
The FHA also offers original mortgage loans that may carry maturity dates of 15 to 30 years. If you secure one of these loans, you'll also need to make an upfront mortgage insurance payment as well as an ongoing payment. The values for these payments are identical to those attached to FHA refinancing loans.
However, there's one important difference: You'll be responsible for paying the full amount of your upfront mortgage insurance premium. Unlike its refinancing loans, the FHA's original mortgages carry no possibility of discounts for UFMIPs or MIPs. In other words, the sum of your upfront and ongoing mortgage insurance premiums will be equal to 39 percent of the mortgage's balance over the lifespan of a 30-year mortgage loan. Keep in mind that these rates are subject to change. Since the FHA continues to increase its UFMIP requirements with some regularity, you should check its website for updated information before making any premium payments.
All upfront mortgage insurance premiums are tax-deductible in some fashion. Since the FHA's tax policies change on an annual basis, you'll need to consult with your accountant or tax preparation specialist to ensure that you report your UFMIP accurately. To calculate the exact amount that you can deduct, subtract any FHA discounts from your total UFMIP and report the difference to the IRS.