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 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.
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 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 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.
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 (800) 785-4788. 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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