FHA mortgage insurance is similar to the private mortgage insurance (PMI) required for conventional mortgages with down payments below 20%, but key differences exist:
Up-front Fees: 1% up-front fee due at closing.
Rate: For fixed rate loans, there is an annual premium of 1.1% to 1.15% of the loan amount per year, divided over 12 months. Variable term MIP rates are 0.25% to .50% per month for 15 year or shorter-term loans.
Removal: FHA MIP is mandatory for the first five years of loans with terms more than 15 years (even if your loan balance reaches 78% of the original home value or sales price. PMI premiums can often be removed if the loan balance is below 80% of current market value. Conventional loans automatically remove PMI when the loan balance falls below 78% of the loan amount.
Exceptions: If you have a loan term of 15 years or less and put down 10% or more of the sales price, the MIP will be cancelled after the loan balance falls to 78% (of the original sales price, or the original appraised value, whichever is less). 20% down on a 15-year loan cancels PMI altogether.
How the MIP Affects Your Loan Decision? Considering that PMI payments do not go towards the principle, or add to the value of the home, most borrowers would choose to avoid paying PMI altogether.
However, It’s hard to avoid paying PMI without putting 20% down. IF you have good credit history, and the money to put 20% down, then a conventional mortgage is probably better for you as PMI would automatically be lifted. However, if the down payment is a family loan or a gift, you may not qualify for a conventional loan even with 20% down. In that case, an FHA loan with MIP may be your only option, if you cannot afford the higher payments of a conventional 15-year mortgage.
Call A and N Mortgage 773-305-5626 for any more questions!