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Last updated on September 8th, 2021 at 03:24 pm
At the time of purchasing a home if you’re making a down payment of less than 20% of the home’s value, then you need to pay private mortgage insurance.
It is an insurance policy that protects a mortgage lender in case a borrower defaults on payments or is unable to meet the contractual obligations of the mortgage.
This insurance is paid to a Private Mortgage Insurance (PMI) company and can cost 1% of the loan annually.
Then we have Mortgage Insurance Premium (MIP) though it has the same purpose of offsetting the default risk to lenders in case of borrowers not paying. The difference being MIP applies to FHA government-backed loans.
MIP has two components UFMIP and annual premium. The one way to remove MIP is by fully refinancing to a conventional loan otherwise a MIP needs to be paid right up to the life of the loan.
Conventional loans
- If your down payment is less than 20% then most lenders, require mortgage insurance.
- The cost of mortgage insurance could decrease depending on down payment between 5% and 20%.
- Until the total equity of your home reaches 20% the mortgage insurance needs to be paid.
FHA insured loans
- An FHA obtained loan requires a 3.5% down payment.
- And regardless of the down payment size, it requires mortgage insurance for the life of the loan.
- An upfront mortgage insurance fee of 1.75% of the loan is charged at the time of closing.
VA loans
- To qualified veterans, the VA offers zero down payment mortgages.
- No matter what your down payment size is the loans guaranteed by the VA don’t require mortgage insurance.
- An upfront funding fee is charged by VA loans.
Reference Source: US Bank
