For as long as anyone can remember, homeownership has been a core component of the American dream. However, many people who dream of purchasing their first home are faced with a significant hurdle – coming up with a sufficient down payment. Thankfully, you can put down less than the traditional 20%, but your lender will likely require you to have mortgage insurance (PMI).
What is Mortgage Insurance?
Mortgage insurance lowers the lender’s risk of providing a loan to you, allowing you to qualify for a loan you may not otherwise be able to get. According to consumerfinance.gov, “borrowers making a down payment of less than 20 percent of the purchase price of the home will need to pay for mortgage insurance. Mortgage insurance also is typically required on FHA and USDA loans.” The cost of your mortgage insurance will be included in your total monthly mortgage payment, your costs at closing, or both.
Loan Types and Mortgage Insurance
If you finance through a Conventional loan, your lender may arrange for mortgage insurance through a private company. This is referred to as private mortgage insurance (PMI). PMI rates can vary by down payment amount and credit score.
Federal Housing Administration (FHA) Loan
If you finance through a FHA loan, your mortgage insurance payments will be referred to as a mortgage insurance premium (MIP). It is a requirement for all FHA loans. Your mortgage insurance premium will be paid to the Federal Housing Administration. According to consumerfinance.gov, “PMI costs the same no matter your credit score, with only a slight increase in price for down payments less than five percent.” FHA mortgage insurance includes an upfront cost, paid as part of your closing costs, and a monthly cost, included in your monthly payment.
If you do not have the cash to pay the upfront fee, you may be allowed to roll the fee into your mortgage rather than having to pay out of pocket. However, this will cause your loan amount and overall cost of your loan to increase.
US Department of Agriculture (USDA) Loan
If you finance through a USDA loan, the mortgage insurance program will be similar to the FHA loan. You will be required to pay for the insurance at closing and as a part of your monthly payment. Like FHA loans, you can choose to roll the upfront portion of the insurance premium into your mortgage rather than paying it out of pocket. However, doing so will increase your loan amount and your overall costs.
Department of Veterans’ Affairs (VA) – backed loan
If you are able to finance through a VA backed loan, the VA guarantee will replace mortgage insurance. VA-backed loans help military service members, veterans, and their families. Although there is no monthly insurance premium, you will be asked to pay an upfront funding fee. The fee amount varies based on:
- Your type of military service
- Your down payment amount
- Your disability status
- Whether this is your first VA loan, or if you have had a VA loan before
You can choose to roll the upfront fee into your mortgage rather than paying out of pocket. However, doing so increases both your loan amount and your overall costs.
When Can You Cancel Mortgage Insurance?
According to www.bankrate.com, “once your loan-to-value ratio drops below 80 percent, you can contact your mortgage lender or servicer and request to cancel borrower-paid mortgage insurance.” In addition, bankrate.com says, “if home values are increasing in your area or you invest in a renovation that increases the home’s value, you might be able to get your property reappraised for the higher value and cancel your mortgage insurance earlier.”
If you obtained a FHA loan after June 3rd, 2013, your MIP will only be canceled once your mortgage is paid in full, unless you made a down payment of at least 10 percent. If your down payment was at 10 percent or more, your MIP will be canceled after 11 years.
If your loan origination date falls between July 1991-December 2000, you are unable to cancel your MIP.
If your loan origination date falls between January 2001-June 3, 2013, your MIP will be canceled once you reach a loan to value ratio of 78 percent.
If you find that your MIP cannot be eliminated, you may want to consider refinancing your FHA loan to a conventional loan.
According to OVM Financial, “there are no options to remove or avoid the USDA annual fee unless the mortgage is refinanced to another product or the mortgage is paid off.”
The Bottom Line
Mortgage Insurance protects the lender in the event you default. It allows thousands of people to become homeowners who otherwise may not be able to. It is natural to want to put down as little money as possible, however, you will want to take long term costs into consideration. A large down payment will allow you to obtain a lower mortgage interest rate, fewer fees, and you can gain equity in your home at a faster pace. When it comes to financing your next home purchase, you will want to consider balancing your short-term financial capabilities with the reality of your local Real Estate market and earnings potential to determine the best long-term financial result for you. Call Michele Harmon Team at 713-818-1330 for questions about the home buying process or click here to connect with one of our preferred lenders.