Oh My, Look at Our Conventional Mortgage Insurance Costs!
For the third time in the last 6 months we've negotiated lower private mortgage insurance (P.M.I.) costs to help you get the best mortgage possible!
How Much Lower will My Private Mortgage Insurance Be?
Maybe you're thinking that it won't make a big difference to use our lower mortgage insurance costs. Let's take a look and see how much money you'll save. If you were buying your first home at a sales price of $200,000 with a 3% down payment* and a 680 credit score, this is how much money you would save each month:
The Other Guy's Monthly Mortgage Insurance Cost
Our Monthly Mortgage Insurance Cost
$21.01 a month
That's $21 every month. What would you do with that extra cash? You could use it to pay for a security system to protect your family or help you pay off your mortgage sooner by applying it towards your principal balance.
*This example is based on a very common first-time home buyer scenario: $200,000 sales price, $194,000 loan amount, 97% L.T.V., 680 credit score, and 25% M.I. coverage. Loan details: 3% down payment, 30 year fixed-rate mortgage, and an annual percentage rate of 5.129% (as of 9/11/2018).
What is Private Mortgage Insurance?
Private mortgage insurance, or PMI, is an insurance policy that protects the mortgage lender in case your loan defaults. It’s required on conventional home loans when your loan-to-value is greater than 80%, which means your down payment is less than 20% of the purchase price. If you’re required to have private mortgage insurance on your home loan, there are two common ways to pay for it.
1. Borrower Paid Mortgage Insurance (BPMI)
Borrower paid mortgage insurance is a monthly cost that’s added to your mortgage payment. The amount of your mortgage insurance premium is determined by your credit scores, loan amount, and other factors. When you choose BMPI, you’ll pay the monthly insurance premium until you’ve reached 20% equity in your home, at which point you can request to have it removed. It’s worth mentioning that unless you request to have your mortgage insurance removed; it won’t automatically fall off until you’ve reached 22% equity in your home.
2. Lender Paid Mortgage Insurance (LPMI)
Lender paid mortgage insurance is an alternative to paying the insurance premium yourself. This option allows you to waive the monthly premium in exchange for a slightly higher interest rate. Even with the increased interest rate, the overall monthly mortgage payment on a loan with LPMI is typically lower than the payment would be with BPMI.
Does Every Loan Have Mortgage Insurance?
We've talked about mortgage insurance for conventional home loans, but what about other mortgage programs? Do they have M.I.? Other common mortgage programs include VA, USDA, and FHA home loans. VA home loans don't have M.I., but both USDA and FHA home loans require mortgage insurance and it's different than the mortgage insurance on a conventional loan. Here are the two biggest differences:
1. USDA and FHA Mortgage Insurance has an Upfront Funding Fee
Conventional home loans only have monthly insurance premiums, but the M.I. on FHA and USDA loans has two parts; an upfront funding fee and monthly insurance premiums. The upfront funding fee is a one-time cost incurred at closing and it's added onto your loan amount, it is not a closing cost.
2. M.I. on FHA and USDA Home Loans Rarely Goes Away
In most cases you'll have to pay monthly mortgage insurance premiums as long as you have a USDA or FHA mortgage, unlike the M.I. on conventional loans that drops off when you've got 20% equity in the home. One of the few exceptions for dropping mortgage insurance would be if you get an FHA home loan and provide a down payment of at least 10%. In that situation you could remove mortgage insurance after you've paid your loan for 11 years.
USDA Home Loan Mortgage Insurance Details
Right now the upfront funding fee is 1% of your loan amount. That means if you're getting a $200,000 loan, the upfront funding fee would be $2,000. The monthly mortgage insurance for USDA home loans is currently 0.35% of the loan amount on an annual basis. So your premium for the same $200,000 loan would be $700 annually, or $58.33 a month.
FHA Home Loan Mortgage Insurance Details
The upfront funding fee for an FHA home loan is 1.75% of the loan amount, which would be $3,500 if you were getting a $200,000 loan. The monthly mortgage insurance on FHA loans is 0.85% of the loan amount, which would be $1,700 a year, or $141.67 a month, on a $200,000 loan.
If you've got questions about mortgage insurance you're not alone! Give us a call or schedule a visit and we'll go over your options and explain how mortgage insurance will impact your home loan.