Understanding Mortgage Insurance: What it is and How it Affects Homebuyers in Reno, Nevada
If you are putting less than 20% down to buy your dream home, you may be required to get mortgage insurance on your loan. Mortgage insurance protects the lender if you default on your loan payments. Mortgage insurance is not required on loans like VA Home Loans for Veterans, but if you are getting a conventional or FHA home loan, it’s important to understand the different insurance options you have. Mortgage insurance offers greater access to homeownership for borrowers who are unable to pay 20% on a down payment.
Private Mortgage Insurance (PMI)
Private mortgage insurance, also called PMI, is a type of mortgage insurance you might be required to pay for if you are putting less than 20% down payment. Conventional loans are standard home loans made by Fannie Mae and Freddie Mac. They typically require higher credit scores and offer competitive rates. FHA offers loans for those putting less than 20% down and they too have mortgage insurance. We’ll cover these two programs and a few others in this article.
There are several different kinds of loans available to borrowers with low down payments. Before we cover loan programs, let’s talk about the basics of MI.
If you get a conventional loan, your mortgage lender may arrange for mortgage insurance with a private company. Private mortgage insurance (PMI) rates vary by down payment amount and credit score but are generally less expensive than FHA rates for borrowers with good credit.
Most private mortgage insurance is paid monthly, with little or no initial payment required at closing. Under certain circumstances, you can cancel your PMI.
Here’s what you should know about PMI:
The most common way to pay for PMI is a monthly premium.
This premium is added to your mortgage payment.
You may also have the option of paying for PMI with a one-time up-front premium paid at closing instead of paying a monthly premium.
Sometimes you may have the option of paying both up-front and monthly premiums.
How much does PMI typically cost?
PMI typically costs between 0.5% to 1% of the entire loan amount on an annual basis.
For example: if you have a $100,000 loan you could be paying as much as $1,000 a year – or $83.33 per month – assuming a 1% PMI Fee.
FHA Mortgage Insurance
If you get a Federal Housing Administration otherwise known as FHA loan, your mortgage insurance premiums are paid to the Federal Housing Administration. An FHA loan is a government-backed mortgage insured by the Federal Housing Administration, or FHA. FHA loans are popular with first-time homebuyers and require lower minimum credit scores and down payments than many conventional loans.
FHA mortgage insurance is required for all FHA loans. It 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 both an upfront cost, paid as part of your closing costs, and a monthly cost, included in your monthly payment.
If you don’t have enough cash on hand to pay the upfront fee, you are allowed to roll the fee into your mortgage instead of paying it out of pocket. If you do this, your loan amount and the overall cost of your loan will increase.
To get FHA’s maximum financing, you need a minimum credit score of 580 or higher and 3.5 percent down payment.
Here’s what you should know about FHA Mortgage Insurance:
There are two kinds of Federal Housing Administration (FHA) mortgage insurance:
Upfront Mortgage Insurance Premium (UFMIP)
Mortgage Insurance Premium (MIP)
You will be required to get both types of insurance when getting an FHA loan.
How much does FHA Insurance typically cost?
Upfront Mortgage Insurance Premium (UFMIP) is a one-time payment and costs 1.75% of the loan amount.
Mortgage Insurance Premium (MIP) is paid annually. It costs between 0.45% to 1.05% of the loan amount. It varies, depending on your down payment, the amount of your loan and its term length.
VA Home Loan
If you get a Department of Veterans’ Affairs (VA)-backed loan, the VA guarantee replaces mortgage insurance. The VA Home Loan is for service members, veterans, and their families and there is no monthly mortgage insurance premium. However, you will pay an upfront “funding fee.” The amount of that fee varies based on your type of military service, your down payment amount, your disability status, whether you’re buying or refinancing and whether this is your first VA loan, or you’ve had a VA loan before.
Like with FHA loans, you can roll the upfront fee into your mortgage instead of paying it out of pocket but doing so increases both your loan amount and your overall costs.
You should plan on paying for mortgage insurance if you are putting less than 20% down on your home. In many instances, mortgage insurance can be canceled once you pay off 20% of your home’s value.
Check with your mortgage lender to find out your options. Mortgage insurance allows you to get into your home with less than 20% down, so even though it may be an added expense, it could allow you to get into your dream home sooner!