Mortgage 101: Mortgage Insurance - Conventional vs. FHA

Posted by Laine Smith on 2/24/15 4:00 PM

Topics: Home Buying

As the U.S. Department of Housing and Urban Development (HUD) announced the lowering of annual FHA mortgage insurance premiums for the first time since 2001, they also projected the change would spur 250,000 homebuyers to purchase their first home over the next three years.MORTGAGE_101-_New_FHA_MIP-1

We know the half-percent drop in FHA’s mortgage insurance premiums (MIP) will widen the pool of home affordability for buyers, but how does it compare to conventional loan mortgage insurance?

FHA Mortgage Insurance

Because the FHA allows for less strict borrower requirements, FHA borrowers are required to pay two types of mortgage insurance, regardless of down payment amount:

  • Upfront mortgage insurance. Borrowers pay a one-time premium of 1.75% of their home loan, meaning a $3,500 upfront charge for a $200,000 loan. Borrowers can finance this charge into their loan.
  • Annual mortgage insurance premium. This premium is figured into the borrower’s monthly mortgage payment. This figure can vary based on loan term and loan-to-value.

An FHA borrower is required to pay annual mortgage insurance for the entirety of the loan term or until they refinance or sell their home.

With the new drop in FHA’s annual mortgage insurance premiums, a typical FH loan now has an annual mortgage insurance premium of .85% as opposed to 1.35% before the reduction.  This recent reduction makes FHA loans very affordable.

Conventional Mortgage Insurance

Borrowers who choose to finance conventionally are also required to pay for mortgage insurance if their down payment is less than 20 percent of the loan amount. Mortgage insurance within a conventional mortgage is known as private mortgage insurance (PMI).

While FHA borrowers pay both upfront and annual mortgage insurance, conventional borrowers are only required to pay either up-front or an annual premium, not both. This amount varies based on the down payment amount.

When choosing the annual premium option, once a conventional borrower’s principal balance reaches 80 percent of the original value, the borrower can request the cancellation of the PMI and once canceled, the borrower will no longer have to pay the annual PMI. If the borrower does not cancel his/her PMI by the time their principal balance reaches 78 percent of the original value of their home, the lender will automatically cancel their mortgage insurance for them.

The best way to determine any potential money-saving opportunities for you is to contact a mortgage banker today to review your loan options and eligibility. For more in-depth information on home buying and financing, read over our Mortgage 101 Handbook

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