You don’t need a 20% down payment to buy a house. In fact, if you opt for a loan that carries mortgage insurance, you might need as little as 3% in some cases.
What is mortgage insurance exactly? Unlike your homeowner’s insurance, these are policies that protect the lender. If you can’t make your payments and default on your loan, mortgage insurance will help the lender recoup their losses.
This extra protection allows lenders to accept lower down payments and riskier borrowers — ones with lower credit scores or higher debt-to-income ratios, for example.
If you opt for a loan with mortgage insurance, there are two forms it will typically take: MIP (mortgage insurance premiums) or PMI (private mortgage insurance). Here’s how those differ:
MIP
MIP, or mortgage insurance premiums, come with FHA loans. You’ll pay them first, as part of your closing costs (this is called “upfront” MIP), and then again as part of your monthly payments. The exact fee depends on how much you put down and your loan balance.
The current fee for upfront MIP is 1.75% of your loan amount, while annual MIP is anywhere from 0.80% to 1.05% (spread across your monthly payments). Refinances come with slightly lower premiums, and some (if you live in Hawaii) can actually be rolled into your loan amount.
MIP is required on all FHA loans. Depending on your down payment size, you may be able to cancel it after 11 years. Many times, though, MIP is a permanent fixture until you sell or refinance your house.
PMI
Private mortgage insurance, or PMI, is what you’ll pay on a conventional loan. Unlike on FHA loans, PMI is optional. You can avoid it by making a 20% down payment (sometimes less, depending on your lender).
PMI costs vary based on your credit score, down payment, lender, and other factors, but it usually runs anywhere from $30 to $70 per month, according to Freddie Mac.
There are no upfront mortgage insurance costs on conventional loans.
Mortgage insurance on other loan types
PMI and MIP are the two main types of mortgage insurance, but USDA loans carry some, too. On these mortgages, it’s called a “guarantee fee,” and it’s paid both upfront and annually. USDA loans are much less common than FHA and conventional loans, accounting for only about 0.5% of all mortgages.
VA loans require no mortgage insurance whatsoever — even for borrowers who make no down payment at all. These loans are reserved for military members, veterans, and their surviving spouses.
The bottom line
Mortgage insurance has its pros and cons — but it’s not required on all mortgage loans. If you’re not sure which mortgage option is best, get in touch with Premier Nationwide Lending today. Our loan officers can give you the personalized advice you need.
Premier Nationwide Lending is an Equal Housing Opportunity lender. Sponsored by NTFN, Inc. 6201 West Plano Parkway, Suite 100, Plano, TX 75093 | NTFN NMLS 75333.
