If you plan to purchase a home, educating yourself on the mortgage and closing process can help you tremendously. In this blog, we will look at one of the many factors of the home buying process: Private Mortgage Insurance.
Too many people view mortgage insurance as a negative, but it’s not, especially for first-time homebuyers. Private mortgage insurance (PMI)* is an insurance policy that protects the mortgage lender or investor from losses due to mortgage default. You will need to pay for mortgage insurance if you plan to pay less than the full 20% down payment.
PMI cost is based on your needs, wants, and qualifications. Different loan programs have different mortgage insurance requirements. PMI can be paid in a variety of ways. Some loans, such as conventional loans, have more flexible options when it comes to paying for PMI. Below, we will go over the PMI requirements for the different loan programs we offer.
A VA loan is the only loan program where you can put less than 20% down and not pay PMI. In fact, you can put as little as 0% down. The way lenders protect themselves in a VA loan is through a one-time funding fee which will be financed into your total loan amount. The funding fee is 2.3% of the total loan amount for first-time users and increases to 3.6% for folks who have previously used the VA loan program.
If a borrower qualifies for a USDA loan, mortgage insurance will be required. USDA loans have a one-time guarantee fee of 1%, which will be financed into your total loan amount. In addition, there is an annual mortgage insurance fee of .35%. This annual fee gets paid monthly and is included in your monthly payment.
• Loan Amount = $200,000
• Annual fee = $700
• An additional $58.33 will be added to the monthly payment to cover the $700 annual fee
• The annual fee will last for the duration of the loan
An FHA loan has the least amount of flexibility when it comes to PMI. You are required to pay mortgage insurance both upfront and monthly. The upfront rate is 1.75% of the total loan amount and will be financed into your loan. The monthly PMI rate is .85%. The mortgage insurance will remain for the duration of your loan.
The only way to remove PMI from an FHA loan is through refinancing. Your Kelly Mortgage Loan Officer will reach out to you annually to review your mortgage and see if you qualify for a refinance that will remove, or reduce, your current mortgage insurance.
A conventional loan has the most flexibility when it comes to PMI. There are multiple ways to pay PMI if one qualifies for a conventional loan program:
• Monthly – This is the most common way to pay any mortgage insurance. The PMI gets added to your monthly mortgage payment, and the cost will be a percentage of the total loan amount. The percentage will depend on your down payment amount and credit score. Monthly mortgage insurance will drop off your payment once you reach 20% equity in your home.
• Lender-Paid PMI – Another way to pay for PMI in conventional financing is through lender-paid mortgage insurance. When utilizing this type of mortgage insurance, the lender will “pay” the mortgage insurance for you. Sounds great, right? Well, there’s a catch. The lender “pays” for your mortgage insurance through a higher interest rate, which will apply to your loan for the life of the loan, or until you decide to refinance. Single-Premium – Single-premium PMI is a one-time lump sum payment that will be included in your closing costs at settlement. This is an excellent option if you have extra cash and want the lowest possible monthly payment. The cost will be a percentage of the total loan amount based on your down payment and credit score.
• Financed PMI – Financed PMI is one of the best-kept secrets in the mortgage industry and provides you with a good middle ground. With financed PMI, you take the single premium mortgage insurance and finance it into your loan amount. However, this is not the most common way to pay for mortgage insurance and won’t always work. You will have a higher monthly payment than if you used single premium mortgage insurance, but your total cash to close will be closer to what it would be if you chose to do monthly or lender-paid PMI.
You may be asking: “Which option is best for me?” That’s a great question and will depend on your needs, wants, and qualifications. Speak with your Kelly Mortgage Loan officer and ask them what loan programs you qualify for. From there, we’ll walk you through your options, as well as the pros and cons of each.
*Mortgage insurance rates may change from time to time, so please check with your Envoy Loan Originator for the most current information available.
**You must be a veteran of the military to qualify for the VA loan program.