You’re probably aware that you’ll have to pay private mortgage insurance (PMI) on an FHA loan if you put less than 20% down. But you may not know how much it will cost you.
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Mortgage Insurance Basics
PMI is short for private mortgage insurance. You pay PMI when you have a conventional loan and make a down payment that is less than 20 percent of the home’s purchase price. So if a home costs $150,000, you would pay just $3,000 as a down payment, and the lender would provide a loan for the remaining $147,000. In this scenario, you would pay PMI of $95.50 per month.
Private Mortgage Insurance (PMI)
Most people who take out a loan to buy a home make a down payment of less than 20% of the purchase price. When you make a down payment that is less than 20%, the lender requires you to purchase private mortgage insurance (PMI) or to pay a higher interest rate. The additional cost of PMI varies depending on the size of your down payment, the type of loan you have, and other factors.
The main reason for private mortgage insurance is to protect the lender in case you default on your loan. If you default, the lender can use the insurance policy to cover any losses.
The cost of private mortgage insurance varies, but is typically between 0.5% and 1% of the loan amount. For example, if you take out a $200,000 loan with a 10% down payment, you will have to pay PMI if your lender requires it. In this case, PMI would cost you $1,000 per year or $83 per month. In most cases, PMI is required for loans with a down payment of less than 20%.
While PMI can be costly, it allows people with less money for a down payment to buy a home. If you are considering buying a home and don’t have 20% for a down payment, talk to your lender about whether or not PMI is right for you.
Mortgage Insurance on an FHA Loan
Mortgage insurance is required on all Federal Housing Administration (FHA) loans. The insurance protects the lender if the borrower defaults on the loan. There are two types of mortgage insurance required on FHA loans: annual and upfront.
The annual premium is divided into 12 monthly installments and included in your monthly mortgage payment. The upfront mortgage insurance premium (UFMIP) is paid at closing and is a one-time premium.
FHA loans with a down payment of less than 10% require an annual premium that is 110 basis points (1.10%) of the loan amount. Loans with a down payment of 10% or more only require an annual premium that is 55 basis points (0.55%) of the loan amount.
For both types of mortgage insurance, the lender must provide an estimate of the premium at closing so that you can compare it to other loans and make an informed decision about which loan is best for you.
How Much Is PMI on an FHA Loan?
FHA loans are a popular choice for first-time home buyers because they allow for a smaller down payment (3.5%) and have more lenient credit requirements. However, they also come with an additional cost called private mortgage insurance (PMI). PMI is insurance that protects the lender if you default on your loan. The cost of PMI varies depending on the size of your down payment and the type of loan you have, but it can range from $100 to $500 per year.
Upfront Mortgage Insurance Premium (UFMIP)
The FHA charges an upfront mortgage insurance premium (UFMIP) of 1.75% of loan amount. This can be paid out-of-pocket or rolled into the loan. If you roll it into the loan, the borrower will finance it and pay it over the life the loan. The length of time over which the borrower pays varies depending on the size of down payment:
5% or less down – 11 years
10% down – 10 years
15% down – 9 years
20% or more down – Upfront MIP is not required
Annual Mortgage Insurance Premium (MIP)
The amount of the annual MIP is announced each year and set by the FHA. The current annual MIP for a 30-year loan is .85% of the loan balance per year, or $85 for every $100,000 borrowed. So, on a loan where you are paying .85%, your monthly payment would be $850 for every $100,000 borrowed. For a home price of $250,000, that would be a yearly mortgage insurance payment of $212.50.
How to Get Rid of PMI on an FHA Loan
If you’re paying private mortgage insurance (PMI) on an FHA loan, you may be able to cancel it. You can also refinance from an FHA loan to a conventional mortgage to get rid of PMI. There are other benefits of an FHA loan, so it’s important that you understand all aspects before making a decision.
If you have an FHA loan and you’re paying mortgage insurance (PMI), you can try to refinance to a conventional loan to remove it. But even if you can’t, there are other options to get rid of PMI.
The FHA PMI cancellation program allows homeowners with FHA-insured mortgages to cancel their mortgage insurance and avoid paying the monthly premium. Homeowners with a conventional loan may be able to cancel their private mortgage insurance (PMI) if they have reached at least 20% equity in their home.
If you’re struggling to make your monthly mortgage payments, you may be able to get help through a loan modification. With a loan modification, your lender agrees to change the terms of your loan to make it more affordable. For example, your lender may lower your interest rate, extend the term of your loan, or forgive part of your debt.
To be eligible for a loan modification, you’ll need to prove that you’re struggling to make your current mortgage payments. You’ll also need to show that you have a financial hardship, such as a job loss or medical bills. If you’re approved for a loan modification, you’ll need to sign a new contract with your lender. This new contract will detail the terms of your modified loan.
Pay Off the Loan
The easiest, but most expensive, way to get rid of PMI on an FHA loan is to simply pay the insurance premiums off in full. This can be done at any time, even before you have paid the loan in full. doing this will immediately terminate your PMI obligations and save you the monthly insurance premium going forward.