When a homebuyer takes out a conventional mortgage and has less than 20 percent of the loan amount to use as a down payment, the lender typically mandates that he or she purchase private mortgage insurance, or PMI. FHA calls their mortgage insurance MIP, for mortgage insurance premium.
What is PMI?
This insurance is of no direct benefit to the borrower – only the lender will see payment if the borrower defaults on the mortgage, yet the borrower pays the premium every month.
The premium you’ll pay depends on your down payment, interest rate and the loan amount but typically varies from 0.3 percent to 1.15 percent of the loan amount. You will pay this amount every month of every year until your equity rises to more than 20 percent of the original loan amount.
That is, if you have a conventional loan. If you pursue an FHA-backed loan, the story is quite different and the change happened in June of 2013.
Before then, if a buyer paid his loan payments regularly, he could cancel the mortgage insurance when he had a 78 percent loan balance. Along came the new rules, however, that stated that any borrower with an original loan balance higher than 90 percent of the appraised value of the home would continue to pay mortgage insurance premiums for the life of the loan.
Yes, it hurt. FHA loans were no longer as competitive as they once were.
The News is Good
This week we’re learning that FHA will be slashing mortgage insurance premiums by by 0.5 percent, to 0.85 percent, or as much as $900 a year. Secretary of Housing Julian Castro expects the move to help at least 250,000 first-time buyers purchase a home.
The upfront premium of 1.75 percent of the appraised value remains in effect, however.
“So a first-time homebuyers taking out a $180,000 mortgage will pay $3,150 upfront and $1,530 a year in premiums for access to FHA mortgage programs that let them purchase a home with as little as 3 percent down. Today, the same homeowner pays $2,430 a year in annual premiums,” claims Inman’s Brittany Morris.
If you’re considering purchasing a home in Blaine and need a low down payment mortgage, the FHA-backed loan just got a whole lot more attractive.