If you’re putting down less than 20% on a home, depending on your loan program you may need mortgage insurance; a policy that protects the lender in the event you can’t make payments. But which type of insurance goes with which kind of mortgage? How much should you expect to pay and for how long? Let’s delve into the details.
For Conventional Loans
With a conventional mortgage, it’s common for borrowers to pay for private mortgage insurance (PMI) until they have reached around 20% equity in the home. The amount a borrower pays – based on factors including credit score and the loan-to-value ratio — ranges from $30 to $70 monthly for every $100,000 of the loan, according to Freddie Mac. In most cases, PMI is included as a monthly premium in mortgage payments, but some borrowers may pay their PMI in a one-time fee at closing.
For FHA Loans
With government-backed Federal Housing Administration (FHA) loans, insurance payments go to the FHA, as one upfront fee paid at closing and as an annual fee that’s often rolled into monthly mortgage payments. The upfront fee is 1.75% of the loan amount, while the annual fee ranges from 0.45% to 1.05% of the amount borrowed. If the borrower puts down less than 10%, insurance is required for the life of the loan, though it may be able to be dropped through refinancing into a new loan once sufficient equity has been built up in the property. If a borrower puts 10% or more down, insurance is required for 11 years.
For USDA Loans
As with FHA loans, US Department of Agriculture (USDA) loans require mortgage insurance, with a similar one-time upfront fee and annual payments. Though USDA mortgage insurance is generally more affordable than FHA mortgage insurance. The upfront USDA fee is 1% of the loan amount, while the annual fee (usually rolled into monthly payments) is 0.35% of the loan amount.
For VA Loans
Backed by the Department of Veterans’ Affairs, VA loans don’t require mortgage insurance – but do come with a funding fee that serves a similar function in guaranteeing the loan. The amount of that fee depends on a variety of factors, including the type of the borrower’s military service, amount of the down payment, and others. And this fee may be waived for a variety of reasons, including disabilities and in the cases of some surviving spouses. For those who do pay the fee, the cost can range from 1.4% to 3.6% of the loan amount.
If you’d like to know more about mortgage insurance, contact one of our loan experts online or call us at (972) 591-3097.