How to Calculate an FHA Loan Payment
FHA loan payments are more complicated than a traditional mortgage payment. They consist of five components: Principal, Interest, Property Taxes, Homeowner’s Insurance, and FHA Mortgage Insurance Premium.
FHA Loan Payment Components
There are five pieces to an FHA loan payment.
- Principal
- Interest
- Property Taxes
- Homeowner’s Insurance
- FHA Mortgage Insurance Premium (FHAMIP)
Calculating any mortgage payment can be confusing. FHA loans are particularly difficult given the requirement to include taxes and insurance and the inclusion of upfront FHA mortgage insurance and FHAMIP. Fortunately, the FHA loan calculator handles the heaving lifting and makes budgeting for an FHA loan a breeze.
The following breakdown will help you understand why your FHA payment is what it is, beginning with the easier aspects and concluding with what’s more complex.
FHA Loan Monthly Escrow
The most straightforward piece of an FHA loan payment is the monthly escrow payment for property taxes and homeowner’s insurance. FHA requires taxes and insurance be included in the monthly payment, so they must be accounted for.
These calculations are simple. Property tax and home insurance are typically billed annually. Dividing the respective annual cost by 12 equates to the amount to be included in the FHA loan payment.
FHA Escrow Example
Annual Property Taxes: $4,500
Escrow Payment for Property Tax: $4,500 / 12 = $375
Annual Homeowner’s Insurance: $1,250
Escrow Payment for Insurance: $104.17
Total Escrow Payment: $375 + $104.17 = $479.17
FHA Principal and Interest Payment
The formula for calculating a loan payment is
P = r(PV) / 1-(1+r)-n
P = Payment
r = rate per period*
PV = Present Value (Loan Amount)
n = number of payments
*Rate per period for a mortgage is the interest rate divided by the number of periods in a year, which is 12 months.
The main variable when computing a correct FHA loan payment is the loan amount (PV). FHA loans have an upfront mortgage insurance premium (UFMIP) financed in, which means it must be computed before the payment can be.
The UFMIP is 1.75% of the base FHA loan amount, which is the purchase price of the home minus the down payment. The typical FHA down payment is 3.5%.
UFMIP Example
Sample Purchase Price: $400,000
3.5% Down Payment: $14,000
FHA Base Loan Amount: $386,000
UFMIP (1.75%): $6,755
FHA Loan Amount: $392,755
FHA Principal and Interest Example
Using the same $400,000 sample purchase price and a sample interest rate of 3.25% over a 30-year term, the FHA principal and interest payment looks like this:
r = 3.25% / 12 = 0.0027
PV = $392,755
n = 30 years * 12 = 360
The resulting FHA principal and interest payment is $1,709.
The amount applied to principal versus interest will vary from month to month. Each month, as the principal balance decreases, more of the payment will be applied to principal.
FHAMIP Calculation
The final piece of the FHA payment puzzle is FHAMIP. The proper calculation is complex. However, if you don’t have access to our FHA loan calculation, which uses the precise formula to accurately depict an FHA payment, there’s a simple shortcut to estimate UFMIP.
The first step is to determine the FHAMIP rate. While it can vary given a larger down payment or 15-year loan term, most FHA loans will use 0.85% of the loan amount to determine the annual FHAMIP amount.
The shortcut for estimating UFMIP then works like this:
0.85% x Loan Amount = Estimated Annual FHAMIP
Estimated Annual FHAMIP / 12 = Estimated Monthly FHAMIP
Using the previous example, estimated FHAMIP is:
0.85% * 392,755 = $3,338.42
$3,338.42 / 12 = $278.20
The actual FHAMIP given the example is $271. To arrive at the correct amount, the FHAMIP rate needs to be multiplied by the average principal balance over the first 12 months instead of the beginning loan amount. This is obviously a much more complex calculation reserved for tools like the calculators found on What’s My Payment.
However, the example above is a good way to estimate the FHAMIP payment if you find yourself needing to predict a payment without the benefit of this website.
FHA Monthly Payment
Given our calculations, our FHA payment looks like this:
Estimated FHA Payment: $2,466
+ $479 Escrow
+ $1,709 Principal and Interest
+ $278 Estimated FHAMIP
Accurate FHA Payment: $2,459
+ $479 Escrow
+ $1,709 Principal and Interest
+ 271 FHAMIP
