What you need to know about FHA mortgage insurance

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Here's one big thing you should know about FHA loans: The federal government's help in getting you a loan despite your credit history or lack of equity isn't free.

You have to pay for mortgage insurance, both up front and with every monthly mortgage payment.

All borrowers, regardless of loan term or loan to value, must pay the 1.75% up-front MIP. You can pay it at closing, or you can roll it into your loan and pay interest on it for the life of the loan.

Most borrowers also have to pay monthly insurance premiums, which are more expensive than private mortgage insurance on a conventional loan.

For a 30-year loan with a loan-to-value below 5%, your premiums will be 1.35% of the outstanding balance each year. With equity greater than 5%, your annual premiums will be 1.30%. That cost is typically divided into 12 monthly payments and added to your mortgage payment.

And most FHA borrowers must pay these premiums for the life of the loan.

Less risky borrowers, such as those with at least 10% equity and 15-year loans, have to pay annual mortgage insurance premiums for 11 years.

Most borrowers should choose a conventional loan if at all possible.

"If the borrower's loan is 80% of the home's value or less, a conventional loan will be better because of the lack of mortgage insurance," says Joe Parsons, senior loan officer with PFS Funding in Dublin, Calif., and author of The Mortgage Insider blog. "If their loan is more than 80% of the value of the property, a conventional loan is also likely to be better because they will be able to drop the mortgage insurance within a relatively short period of time."

Non-FHA loans usually let borrowers drop PMI once the loan balance is down to 80% of the purchase price and after a minimum of one year.

Conventional loans also allow you to count home-price appreciation toward the needed equity. FHA mortgages do not.

You can, however, save on FHA MIPs if you opt for a shorter-term loan. On a 15-year loan with less than 10% LTV, your annual premiums are 0.70%. With more than 10% LTV, premiums are 0.45%.

Also, if you're doing an FHA streamline refinance to replace an FHA loan endorsed before June 1, 2009, you get a break.

Your up-front mortgage premium is just 0.01%. That's just $10 on a $100,000 loan. Your annual premium is 0.55%, or $550 per year on a $100,000 loan. In 2013, 61.8% of streamline refinances qualified for these lower premiums.