In most cases, if you put less than 20% down when you buy a house, you will be required to pay mortgage insurance (MI). This type of insurance protects the lender if you fail to make your monthly payments. The benefit to you, the borrower, is that it may help you qualify for a loan for which you may not otherwise be eligible.
While there may be exceptions and programs that allow you to avoid mortgage insurance, even with a small down payment, the type of mortgage insurance you will pay will generally depend on the type of loan you receive.
Mortgage Insurance by Loan Type
Mortgage insurance required for a Conventional loan is provided by a private company and may be referred to as private mortgage insurance (PMI). The mortgage insurance premiums (MIP) for Conventional loans are paid to the private company and may vary based on lender requirements, the terms and size of the loan, as well as your credit quality and income.
For FHA and USDA loans, mortgage insurance premiums (MIP) are paid to the respective government agency. Mortgage insurance is required for all FHA loans, with the main variance in amount being the size of your down payment, irrespective of your credit score. There is an additional up-front fee due at closing that may be rolled into the mortgage, increasing the total loan amount. For USDA loans, MI operates similarly, but may cost less.
Mortgage insurance is not required for VA loans and is instead replaced by the VA Funding Fee. While there are no monthly premiums, there is an up-front fee that may be rolled into the mortgage. The amount of this fee varies based on a number of factors.
When Mortgage Insurance is Paid
In many cases, with both PMI for Conventional loans and MI for Government loans, premiums are collected on a monthly basis with your mortgage payment. However, some Conventional loan programs may offer the option to pay an up-front, single premium, eliminating the need for additional monthly MIP payments.
How Long Mortgage Insurance Must be Paid
With a conventional loan on a primary residence, PMI will automatically cancel when your mortgage balance drops to 78% of the original home value, or you reach the middle of your mortgage term — whichever occurs first. You do have the option to request cancellation once your loan-to-value (LTV) reduces to 80%. In both situations, you must be current on payments with good history, have no additional liens against the property and your home should not have decreased in value.
For FHA loans that begin with a 90% or greater LTV (i.e. less than 10% down), the mortgage insurance will remain for the life of the loan. For FHA loans that begin with less than 90% LTV (more than 10% down), mortgage insurance may be required for 11 years. Mortgage insurance on USDA loans is paid for the entire loan term.
If you have questions about mortgage insurance or want to learn about low down payment programs that don’t require MI, contact a loan officer near you.
Castle & Cooke Mortgage, LLC® (NMLS #1251) is a leading independent mortgage lender headquartered in Draper, Utah, with locations across the United States.
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