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The old adage when it came to getting a mortgage was that you absolutely had to have a 20% down payment. While this may have been true for our parents and grandparents, it’s no longer the case. In recent years, it’s been possible to get a home for as little as 3% down.

Of course, there are advantages to a higher down payment. Responsible lending is all about risk management. If you make a higher down payment, you can get a better rate because it means less risk for the lender if you have more invested upfront because you’re less likely to walk away. Another way lenders manage risk is through mortgage insurance.

Most loans with less than a 20% down payment or equity stake will require some form of mortgage insurance, but just because you need it doesn’t mean you should pay more than you have to. In fact, if you get a conventional loan with private mortgage insurance (PMI) payments, Quicken Loans is offering some of the lowest  private mortgage insurance rates in the industry.*

Whether you’re looking to buy or refinance, we’ll go over what a difference your mortgage insurance rate makes. Before we get into that, let’s get back to basics so you can cut through the terminology.

What’s Mortgage Insurance?

You may hear the term mortgage insurance thrown around when you’re going through the application process for your loan, but what is it and what does it cover?

Mortgage insurance is mandatory for most loans with less than a 20% down payment or amount of equity. In exchange for making a lower down payment, the mortgage insurance helps protect the lender in the event that something happens that causes you to default on your home.

Mortgage insurance comes in several different forms. The mortgage insurance on conventional loans from Fannie Mae or Freddie Mac is known as private mortgage insurance (PMI). There are also a couple of different types of PMI, but we’ll come back to that in a minute.

Conventional Loans: The Two Types of PMI

Before we go any further, let’s take a look at the two varieties of PMI: borrower-paid mortgage insurance (BPMI) and lender-paid mortgage insurance (LPMI) programs.

BPMI

BPMI is pretty straightforward. You pay a flat fee every month for mortgage insurance until you reach 20% equity in your home.

The nice thing about BPMI is that you keep the same mortgage rate and you can request to stop paying for mortgage insurance when you reach 20% equity in your home, as long as you’re current on your mortgage payments and your property value hasn’t declined. In any case, it automatically comes off once you reach 22% equity and your monthly mortgage payment will be lower for the remainder of your mortgage term.

LPMI

This can be done in one of two ways or a combination. First, you can take a slightly higher interest rate to cover the cost. Second, this cost can be paid upfront at closing and you can keep your mortgage rate the same. As mentioned above, it is possible to do a combination of the two approaches. Either way, you will have no monthly mortgage insurance payment.

LPMI will help lower your monthly mortgage insurance payments, but unlike BPMI, your mortgage payment will stay the same for the life of the loan.

FHA Loans

FHA loans have mortgage insurance rates that are set by the government and don’t change. Referred to as mortgage insurance premiums, or MIP, there are upfront premiums of 1.75% that are collected at closing or built in to the loan, as well as annual premiums split into monthly payments.

The cost of the annual premiums varies depending on the size of your down payment. If you make the minimum 3.5% down payment, your annual mortgage insurance premiums would be 0.85% of the loan amount.

If you make a down payment of 10% or more, mortgage insurance payments come off after 11 years even on FHA loans, but not everyone has this amount of savings. If your down payment is lower than that amount, you’ll have mortgage insurance payments on FHA loans for the life of the loan.

“Life of the loan” is a key phrase here. If you qualify, once you reach 20% equity, you can refinance out of an FHA (or any other loan that requires lifetime mortgage insurance) into a conventional loan and never pay mortgage insurance again. In some cases, it may make sense to do this sooner if you can get a lower mortgage insurance rate on a conventional option. Here’s more on ditching mortgage insurance altogether.

USDA Loans

USDA loans have the equivalent of mortgage insurance in the form of upfront and monthly guarantee fees set by the government. These last for the life of the loan.

The upfront guarantee fees on USDA loans are lower than FHA loans at 1% of the loan amount. The annual fees are also lower, only 0.35% of the unpaid principal balance on the loan each year.

VA Loans

Finally, VA loans replace mortgage insurance with a one-time upfront funding fee. This can be rolled into the loan if you don’t want to pay it at closing.

The amount of this fee depends on how many times you’ve used a VA loan. If this is your first time, the fee is 2.15% of the loan amount and goes down from there if you buy other primary homes in the future. This may be waived if you have a service-related disability or you’re a surviving spouse.

What Mortgage Insurance Isn’t

There’s one important point to make before moving forward – although mortgage insurance is designed to limit the liability for a lender if you should default on your payments, it doesn’t pay off your mortgage payment if you pass away. It’s often confused with mortgage life insurance.

If you wish to get an insurance policy to pay off your mortgage so your family can stay in your home after you pass on, you can contact an insurance carrier to look into mortgage or general life insurance policies to accomplish your goal.

When it comes to fees, it’s absolutely understandable to want to pay as little as possible. That’s why it makes sense to go with a lender like Quicken Loans that offers some of the lowest private mortgage insurance rates in the industry.

Are you ready to get started? You can apply online through Rocket Mortgage ® by Quicken Loans. Otherwise, one of our Home Loan Experts would be happy to take your call at (888) 980-6716. If you have any questions, you can leave them in the comments below.

*BPMI Monthly and LPMI Single rate data is compared to publicly published private mortgage insurance rates

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This Post Has 10 Comments

  1. Hello,
    The wife and I found a home that we love and we are approved with an FHA loan. However, this particular home is being sold by Open House and FHA will not finance it due to a 90 Day ownership rule to prevent flipping the home. We tried for a low down payment conventional through my wife’s credit union, but were denied due to my credit. Hers is excellent, near 800 and she makes $65k /year. Mine is at 650 ( and improving) with a 3yr old dismissed BK and foreclosure ( lawyer tried to use BK to buy time to settle with lender on foreclosure, dismissed due to low debt, paperwork issues). I make $102k/ year. House is $300k. Debt for me is large student loan payment of $1100/mo (ex-wife’s included:(). Debt for her is one $500/ car payment. Cc debt mostly paid off…maybe $900 balance at moment, but can pay off easily. I was planning on putting 6% down as a loan from my 401k. Are there any programs out there that fit our profile? I really hate the permanent PMI of the FHA and would like to gat a product where we can drop it after 20% equity? Thanks!

    1. It sounds like you’re on the right track to improvement, Jim. For a conventional loan option, depending on the type of bankruptcy, you would have to wait until it was dismissed for at least four years. There are a couple of other options we can look at for you other than FHA potentially. Another thought is that if it made sense, you always have the option of refinancing out of the FHA loan and into a conventional loan down the line. I’m going to recommend you speak to one of our Home Loan Experts at (888) 980-6716. They would be able to take you through some scenarios. Hope this helps!

  2. I’ve been out of work for over a year do to an injury at work I’ll looking to buy a house in NC for around 100,000 with 20 % or more down
    I’m 64 won’t be 65 till Jan to retire I have great credit 780 (just checked) I do receive comp and will till 65 weekly would I still be able to get a loan under these circumstances
    Thank you
    D

    1. Hi Dom:

      Currently, we can only qualify you with unemployment income if you are a union employee or have a seasonal job where you would receive such income normally. However, once you retire, we can accept Social Security or any other retirement income you might receive. If you would like, one of our Home Loan Experts can go over your options if you call (888) 980-6716. Hope this helps!

  3. What is the lowest mortgage that can be done for an investment property? The market I deal with is primarily under $50k. Thanks

    1. Hi Dave:

      the only places where we have minimum loan amounts are Alaska and Iowa. The minimums there are $25,000. Other than that, there really is no minimum. It’s just a matter of whether the closing costs work for you. I’m going to recommend you speak with one of our Home Loan Experts by calling (888) 980-6716.

  4. A potential buyer for a piece of property I own is interested in buying it, but the PMI payments quoted by a mortgage company would make his monthly payment higher than he expected. The potential buyer has low income, but excellent credit, and can only pay 3.5% down payment. His credit score is about 760. He only qualified for a 30 year loan because of his income level. The sales price of the property is $175,000.
    From this information, could you quote a monthly rate for PMI insurance? The mortgage company quoted a rate of 4.375%.

    Bill

    1. Hi Bill:

      I’m going to advise that your buyer call and talk to one of our Home Loan Experts at (888) 980-6716. The rate you’re giving me doesn’t sound like the mortgage insurance rate, it sounds like the mortgage rate itself. It’s possible that mortgage insurance could affect that rate because if he went with a lender-paid mortgage insurance option, he wouldn’t pay a separate monthly fee for mortgage insurance, but his monthly payment would be slightly higher. We could help him sort this out and potentially go over his options.

      Thanks,
      Kevin Graham

    1. We can certainly help you with that if you qualify, but HARP has some fairly specific requirements. I’m going to recommend you check out our tool first and make sure you meet the basic requirements. There are also equity restrictions, but if you want to check out your options online, you can do so with Rocket Mortgage. You can also talk to one of our Home Loan Experts at (888) 980-6716. Hope this helps!

      Thanks,
      Kevin Graham

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