Mortgage Insurance: PMI & Other Types – What do they Cost? Can they be Eliminated? If so, How & When?

Dear Friend,

     First of all, please know that as long as I continue to remain in this fun and exciting business, I will always be here to answer your questions and provide you with whatever information or assistance you need. It is always a joy to hear from a forever client!
I often receive questions asking for a refresher on how mortgage insurance works. I thought I might send this email to summarize the different types of mortgage insurance: including how much mortgage insurance costs on an up-front and/or monthly basis, whether or not it can be eliminated, and if so – how and when can it be eliminated. Perhaps you will find this information helpful?  Perhaps you have a friend or a family member who will?

Conventional  Loans = PMI (Private Mortgage Insurance):

PMI is required when a Buyer puts less than 20% down on a purchase, or on a refinance when there is less than 20% equity in the property based on the appraised value.

Cost of PMI: Unlike FHA or RD Loans, the PMI rate will vary depending on the Buyer’s credit score. PMI rates will also get cheaper as the Buyer increases his/her down payment in 5% increments. Likewise, when refinancing, the PMI will get cheaper as  5% equity positions are reached based on an appraisal until it becomes non-applicable with an appraisal showing 20% equity.

PMI Rate Chart

Borrower Paid PMI Rate and Example:

From 0.19% as a low on a 15% down purchase with credit score > 760.
For Example: $100,000 Mortgage Loan x 0.19% = $190 per year, divided out as $15.83 added to escrow in the mortgage payment.

To 1.61% as a high on 5% down purchase with credit score < 640.
For Example: $1000,000 Mortgage Loan x 1.61% = $1,611 per year, divided out as $134.25 added to escrow in the mortgage payment.

Can PMI be Eliminated?
Yes, PMI will automatically terminate once the Borrower has paid down the principal balance to 78% of the original sales price. This type of termination of PMI is accomplished without any other action needed from the homeowner. However, if you want to take advantage of the appreciation in your property to eliminate PMI, and have a good payment history, you can request to have your PMI canceled once you can demonstrate that you have 20% equity based on a new appraisal that you will have to pay for.

FHA Loan = MIP (Mortgage Insurance Premium):

MIP is required for all FHA loans, regardless of how much money the Buyer puts down, or how much equity the borrower has in the property when refinancing to a new FHA mortgage.

Cost of MIP: The rate for the MIP does not change for credit score on an FHA Loan. There is a slight decrease in the annual (or monthly payment) rate for down payments of 5% or more. The FHA annual Mortgage Insurance Premium had increased multiple times since 2008, then was finally reduced by 0.500% in January of 2015. There is also upfront MIP that is paid to HUD on an FHA loan. This upfront MIP is 1.75% of the loan amount and is most often financed, or “rolled into” the mortgage loan.

FHA MIP Rates & Example:  As of 01/15/19, the annual rate for an FHA 30 year terms is .85 (for LTV of 95% or less, the annual rate is .80)
For example: $100,000 Mortgage Loan .85 = $850 per year, divided out as $70.83 added to escrow in the mortgage payment.

Can FHA MIP be eliminated?
Yes & No. Yes, if the FHA Mortgage had a case number assigned prior to June 3rd, of 2013, then the MIP will terminate automatically when 2 requirements are met:  (1) the borrower has paid on the loan for at least 5 years, and (2) the loan has been paid down to 78% of the original value. Both requirements must be met; getting an appraisal to show 20% equity does not allow for a cancelation request for FHA mortgage insurance. If the FHA loan had a case number assigned after June 3rd, 2013, then the FHA MIP will remain on the loan for the entire term.

RD Loan = Funding Fee:

There is a Funding fee required for all RD Loans, regardless of down payment.

Cost of RD Funding Fee: The Rate for the RD Funding Fee does not change based on credit score or down payment (RD is usually a zero down loan anyway). As with FHA, the RD loan also has upfront mortgage insurance. RD’s upfront mortgage insurance is called a “Funding Fee” but paid to the USDA and is 1% of the Loan amount.  Like FHA and VA loans, the Funding Fee on an RD loan is usually financed back into the loan amount so that the buyer does not have to pay out of pocket at closing.

RD Funding Fee Rates & Examples: As of 01/15/19 the annual rate for the RD Funding fee is .35%

For example: A  $100,000 Mortgage Loan .35 = $350 per year, divided out as $29.17 added to escrow in the mortgage payment.

Can the RD Funding Fee be eliminated?
No, the annual RD Funding Fee will stay on the loan for the entire term.

VA Loan = Funding Fee:

The VA Funding Fee does not change based on credit score, and is only required to be paid upfront, and there is NO annual (or monthly) mortgage insurance on VA Loans!  Because of this, VA Loans will typically have the lowest APR’s compared to any other insured mortgage loan.

Cost of VA Funding Fee: As stated above, there is no annual or monthly charge on VA Loans. Like FHA & RD Loans, the upfront VA Funding Fee is most often financed back into the loan.

The VA Funding Fee will be slightly higher for Reservist and National Guard members than for Veteran’s who are considered Regular Military. As of 01/15/19,  the VA Funding Fee for Regular Military is 2.15% of the loan amount for 1st-time use, and 3.3% of the loan amount for subsequent use. The Veteran who is putting 5% down will only pay a Funding Fee of 1.5% and with a 10% down payment, the Funding Fee is reduced even further to 1.25%.  A Veteran who receives VA Disability pay is often exempt from having to pay the upfront Funding Fee altogether.

VA Funding Fee Rates & Examples: The rate for annual VA Funding Fee is Zero (0%)
For Example: $100,000 Mortgage Loan x .00 = $0.00 per year divided out as $0 added to escrow in the mortgage payment.

Can the VA Funding Fee be eliminated?
N/A as there is no annual (monthly) mortgage insurance to begin with.

Recommendations:

  • The above examples are based on 30 year fixed rate terms.

  • Conventional PMI discussion above refers to “Borrower Paid PMI” but Conventional Lenders usually also offer “Lender Paid PMI” and “Single 1 time paid PMI”.

  • Conventional PMI offers reduced PMI rates for terms of equal or less than 20 years.

  • FHA MIP is also reduced for 15-year terms.

  • You should consult a Tax Advisor to determine if the mortgage insurance you pay qualifies for a tax deduction.

Let’s face it, no one likes paying PMI, or the FHA/RD versions of mortgage insurance for that matter. However, millions of homeowners have successfully used insured mortgage programs as a way to be able to purchase their homes when they could not have otherwise. Later, a homeowner often takes advantage of appreciating home values and refinances into lower rates & reduced terms, while eliminating their mortgage insurance in the process as they are able to show a new appraisal that reflects 20% equity.  Other homeowners who originally purchased with mortgage insurance backed programs, will later sell at a profit, taking the proceeds to put 20% down or more on their 2nd home, and so on.

Tell me your goals!

I would like to thank you for reading my emails and extend an offer to any of your friends or family who may want to sit down and discuss their mortgage financing options. As a past customer, you are always a customer and I delight in hearing from you. Thank you for all of your support.