Mortgage insurance protects your lender against loss in the event it has to foreclose on your home and there are insufficient proceeds to pay back the principal, interest and foreclosure expenses.
There are generally two categories of mortgage insurance: government-sponsored programs and private mortgage insurance, or PMI.
Generally, all government programs require mortgage insurance, regardless of the size of the down payment or the amount being borrowed, while PMI is only required for loans larger than 80 percent of the value of the home.
There are three government agencies that provide mortgage insurance: the Federal Housing Administration, the Veterans Administration and the U.S. Department of Agriculture.
All require an up-front payment. FHA and USDA refer to it as an up-front, mortgage-insurance-premium; VA calls it a VA funding fee.
The FHA’s base fee is 1.75 percent and USDA’s is 2.75 percent of the loan amount. VA charges a fee of 2.15 percent. The fee is more for a second or subsequent use, less if the veteran has a down payment. Qualified disabled veterans are exempt.
FHA and USDA also charge a monthly premium; there are no monthly premiums for VA loans. The monthly premium for USDA loans is 0.5 percent. FHA’s base fee is 0.85 percent, but it has lower fees for borrowers with a down payment of 5 percent or more or a 15-year loan. There is no way to avoid mortgage insurance on a government-sponsored program unless you’re a qualified disabled veteran.
Unlike government mortgage insurance, PMI is not required for loans that are 80 percent or less of the home’s value, and up-front premiums are not required. The monthly premium cost depends on the size of the loan (as a percentage of the price) and the borrower’s credit score.
On a conventional loan, you can avoid PMI by putting 20 percent or more down or by obtaining a second mortgage to cover part of the 20 percent down payment.
Another option is to choose a “No-PMI” program, which involves the lender raising your rate to pay a large up-front premium to the PMI company, which eliminates monthly premiums.
Steve Setka is an exclusive buyer’s agent with Keller Williams Realty in Durango and a licensed mortgage originator. He can be reached at 903-7782 or firstname.lastname@example.org.