Your FHA mortgage insurance may never end

The pre-approval letter says FHA and it says a rate. It does not say that the loan carries two separate insurance premiums, that the first one is added to the balance before you make a single payment, and that the second one may outlive the reason it exists.

The upfront premium is normally financed, which is a polite way of saying you start owing more than you borrowed. On this house it is added to the loan on day one, and it is the largest single line in the “services you cannot shop for” block of the Closing Disclosure — the block, by design, that you have no ability to negotiate.

The annual premium is the one that gets misread. It is not a fixed monthly bill. It is charged against the average outstanding balance of each year, so it falls every year — slowly. The figure a lender quotes you is the first year’s figure, which is the highest one you will ever pay. Comparing that to a conventional PMI figure is comparing two different machines: conventional PMI is fixed on the original amount until it dies, and FHA’s decays but may never die at all.

Not your credit score. Not your income, your reserves, your payment history or how well you behave for the next decade. Two inputs, both fixed on the day you close: your loan-to-value and your term.

And the LTV that reads this table is not the LTV that reads any other table. The financed upfront premium is excluded from it, and it is truncated to two decimals rather than rounded up the way the conventional pricing grids do it. On a 30-year loan, one hundredth of a percentage point on the wrong side of 90.00% moves the premium from eleven years to three hundred and sixty months.

That is why “put 10% down” is the wrong instruction. Ten percent of the purchase price is a coincidence that usually lands on the right side of the line. The line itself is 90.00% of the adjusted value, and it is worth checking to the cent.

This buyer has $43,000 saved. Put all of it down and the base loan amount lands just above the line: the LTV comes out at 90.09%, which is in the second band, which runs for the full term. Put $410 more and it lands at exactly 90.00%, which is in the first band, which stops after eleven years.

Same house. Same month. Same rate, same lender, same everything. Four hundred and ten dollars at the closing table against nineteen more years of premium.

And here is the part the rest of this site exists to make you notice: at the seven-year horizon this buyer declared, the two scenarios cost almost exactly the same. Both are paying 50 basis points for the whole of those seven years. The $410 buys nothing at all until the month the eleven-year clock runs out — and everything after it. Whether that step is worth taking is a question about how long she stays, which is why we ask that question before we show anyone a payment.

The received wisdom is that FHA is for buyers with weaker credit and conventional is cheaper if you can reach it. The received wisdom is half right, and the half it gets wrong costs real money in both directions.

FHA’s premium does not look at your score at all. Conventional private mortgage insurance looks at almost nothing else. So the two products cross somewhere, and where they cross is not a matter of opinion: it is arithmetic on published grids. Below the run the table shows the same house, the same month, the same seven-year horizon, with only the credit score moving.

Two things fall out of it. The FHA column is a flat line — a 620 and a 780 are charged the same rate in basis points, which is either the fairest thing in the mortgage market or the strangest, depending on which side of it you are standing. (The few cents that do move across the sweep are the rate benchmark shifting band at 680, not the premium schedule; FHA’s schedule does not contain a credit score.) And the conventional column swings by a factor of almost four across the same range, on the same loan, for the same house.

Read across to find the row where the winner changes. Below that row, the loan that insures forever is still the cheaper one over seven years. Above it, the conventional loan is cheaper and its insurance dies on a date the law fixes. Very few people are told which side of that line they are on.

This is the asymmetry that decides most of these files, and it is the one thing about mortgage insurance that federal law is unambiguous about. On a conventional loan the private insurance has three dates, all of them computable from the closing table forward, and all of them measured against the original value.

That last part is where people lose money. Original value means the lower of the contract price and the appraisal, at the time of the transaction. The house appreciating does not accelerate any of these dates. If you want a new appraisal to count, that is a different route with different rules that belong to the loan investors, not to this statute, and it is not automatic.

Note the gap between the first two dates. Between them sits the number of months you keep paying a premium the law would have let you cancel, simply because nobody told you to send a letter.