Q: I'm trying to compare an FHA loan with a conventional loan for a home purchase. I have 5 percent for a down payment, so either way I'll have to pay mortgage insurance. My question is: Which mortgage insurance is easier to get rid of faster, FHA mortgage insurance or private mortgage insurance?
There are many ways to compare an FHA loan and a conventional mortgage, including the interest rates, fees and down payment requirements. You are smart to look into the mortgage insurance angle, because those premiums can impact your monthly housing payments for a long time.
Here is the current breakdown on FHA mortgage insurance premiums:
- FHA loans require an up-front mortgage insurance premium, currently 1.75 percent of your loan amount. You can wrap this premium into your mortgage, which means you'll be paying interest on that premium for the life of your loan. This mortgage insurance is not cancellable.
Conventional loans with a down payment of less than 20 percent require private mortgage insurance (PMI). The amount you'll pay varies according to your credit qualifications and your loan-to-value ratio.
You also have options with PMI such as paying monthly, wrapping your costs into your mortgage by paying a higher interest rate or a combination of the two.
Eliminating mortgage insurance
PMI on a conventional loan is typically eliminated when your loan-to-value ratio reaches 78 percent either because you have made additional principal payments, your home has appreciated, or you have simply paid down your loan. You will need an appraisal to prove that your home's value has appreciated.
FHA loan requirements are slightly different. If you have a 30-year fixed-rate loan, your annual MIP is automatically cancelled when your loan-to-value ratio reaches 78 percent, as long you have been making MIP payments for at least 60 months. There is no minimum payment requirement on a 15-year FHA loan.
FHA does not allow you to get an appraisal to show property appreciation, so the loan-to-value ratio is purely based on the original appraised value of your home or your original purchase price, whichever is lower.
To make a comparison between FHA and conventional financing based on mortgage insurance, you'll need to consult with a lender to estimate your PMI premiums and think about whether you plan to make extra principal payments.
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