One of the tops signs of a healthy and growing country is the percentage of people that own homes. It is in the best interest of the country to offer multiple options for people to purchase a home. We need to clear up the myth that a potential buyer needs a 20% down payment to get a home. As with anything, there are some trade-offs when you get a mortgage loan with a down payment lower than 20%. In most cases, you will have to pay mortgage insurance.
What is mortgage insurance?
Mortgage insurance is generally required by a lender when a down payment on a property is less than 20%. The insurance protects the lender in case a borrower falls behind on payments. Mortgage insurance is almost always required on FHA and USDA loans. Mortgage insurance can be bundled in your mortgage, part of your closing costs, or both.
What are some different types of Mortgage Insurance?
There are four types of insurance right now.
PMI – PMI stands for private mortgage insurance. PMI is usually associated with conventional loans. The rates are different based on the amount of the loan, and the lenders credit score. The rates are usually lower than an FHA mortgage insurance policy and can eventually be cancelled, usually when you have reached the 20% on the loan amount. Be sure to contact your lender to find out the qualifications for cancelling the insurance.
MIP – Mortgage Insurance Premium. The MIP is associated with an FHA loan, and is run by the FHA themselves. Your credit score doesn’t factor into the rate, and changes only slightly higher if your down payment is lower than 5%. Be aware that the MIP is paid through upfront fees as well as part of your closing cost, and part of the costs bundled into your monthly mortgage.
VA Loan – The Department of Veteran Affairs loan does offer a guarantee that replaces the mortgage insurance. However, in its place is a variable upfront funding fee which depends on several different factors. They are based on type of military service, the down payment amount, disability status, buying a home or refinancing, or if it is a first loan.
USDA Loan – The department of Agriculture also offers loans with low down payments in rural areas. As with the other loans, mortgage insurance is the trade off for a lower down payment. Similarly, your upfront mortgage insurance cost will be a portion of your closing costs as well as part of your monthly mortgage payment. They are generally less expensive than an FHA mortgage insurance premium.
Canceling Private Mortgage Insurance
The positive part of mortgage insurance is that if you are on a private mortgage insurance, you can cancel your insurance when you meet certain requirements. On government backed loans, however, mortgage insurance is required for the life of the loan.
While mortgage insurance can be costly as part of a loan, it allows potential buyers to get into a home under certain programs where they don’t necessarily have enough for a 20% down payment. This can help buyers get into a home faster and give them all the benefits of owning a home.