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What You Need to Know When Shopping For FHA Mortgage Insurance
Author David Schneider | Jan 21,2008
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Most mortgage borrowers hear the term private mortgage insurance (PMI) at some point during the mortgage process. Private mortgage insurance is required when a homebuyer puts less than a 20 percent down payment on a home purchase. When the buyer is using a FHA mortgage to buy the home and puts down less than 20 percent, FHA requires a mortgage insurance premium (MIP) instead of private mortgage insurance.
What You Need to Know When Shopping for FHA Mortgage Insurance -- Costs
While private mortgage insurance is part of your monthly mortgage payment, FHA requires that borrowers pay the mortgage insurance premium upfront. The premium required is 1.5 percent of the loan amount, paid at closing or rolled into the amount of the mortgage.
After closing, a monthly mortgage insurance premium payment is included in the principal interest taxes and insurance, at half a percent of the mortgage amount. The only exception to mortgage insurance premiums is for condominiums, which do not require an upfront MIP, but do require a monthly mortgage insurance payment.
FHA Mortgage Costs Compared to Conventional Mortgages
Ironically, mortgage insurance premiums for FHA loans are significantly higher than the private mortgage insurance paid on conventional mortgage programs. While FHA loan borrowers pay 1.5 percent of the mortgage amount, conventional loan borrowers pay approximately half of a percent. Renewal rates have the same comparison, with FHA borrowers paying half of a percent while conventional mortgage borrowers can renew at a rate as low as three-tenths of a percent.
What You Need to Know When Shopping for FHA Mortgage Insurance -- Private Mortgage Insurance Vs. FHA Mortgage Insurance
FHA mortgages have stringent guidelines for qualification. These types of mortgages also have added restrictions when it comes to mortgage insurance. First, FHA mortgages have maximum loan amounts, which are lower than mortgages with private mortgage insurance.
FHA mortgage insurance premiums are higher than private mortgage insurance. Another difference between conventional mortgage insurance and FHA insurance is that private mortgage insurance can be cancelled once the loan has been paid down to a certain point, while FHA insurance lasts for the life of the loan.
FHA mortgages have many advantages, but they also have disadvantages. The cost of FHA mortgage insurance premiums may work for some borrowers, but they may be too stringent for others. Be aware of FHA mortgage insurance premium restrictions and compare them to private mortgage insurance options to decide which program works best for you. |
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