Mortgage Matters: Down-Payment Options May Make Homeownership A Reality
The most recent National Association of Realtors profile shows that 40 percent of repeat buyers and 66 percent of first-time homebuyers are putting less than 10 percent down. Understanding all of your low-down-payment mortgage options may aid you in obtaining a mortgage while helping to save money.
Different types of mortgages can be tailored to purchase a home. If you’re looking to use a conventional loan and you made a down payment of less than 20 percent of the home’s value, you’re probably going to need mortgage insurance, commonly known as PMI. If using, for example, a government FHA loan, you’re going to need mortgage insurance, known as MIP. Confusing I know.
With the lowest of the down payment, PMI or MIP is always required. Those insurances are the lenders protection in the event of default. Let’s take a look at the differences.
FHA MIP: Many people think FHA or The Federal Housing Administration provides a service that is markedly different than the service private mortgage insurers provide. The reality is both FHA and PMI insurers provide the same service, with some key differences. FHA MIP does cost 1.75 percent of the total home value right away with an additional .85 percent paid on a monthly basis. Over the life of the loan this can result in thousands paid to insure your loan. FHA loan with MIP can never be terminated.
Conventional PMI: Allows a borrower to put less money down, as little as 3 percent down, whereas FHA requires a 3.5 percent down payment. The bonus is your ability, in most cases, to use gift funds from a relative for the down payment. PMI may be tax deductible whereas MIP is not. Does your credit score matter on a conventional loan? Yes. PMI premiums are adjusted based on your credit score. FHA MIP is the same no matter the score.
WHAT MORTGAGE INSURANCE IS NOT:
It’s not life insurance or credit disability insurance or job loss insurance. Don’t want to keep paying your mortgage insurance fees? Your loan documents can state automatic termination of PMI when you pay 78 percent of the original value. With an FHA loan you’ll have to continue paying MIP for the life of the loan. Those monthly premiums can cost you and may be an important aspect to consider when you choose between a conventional loan with PMI and a government loan with MIP.
As a generic contrast, PMI vs. MIP can save you thousands over the life of the loan. By adding a little each month to the principal balance of your loan, you can achieve the 78 percent termination ratio much faster, thus allowing for the elimination of the fee. If you’re looking to save the cost of PMI and don’t have a 20 percent down payment, consider LPMI or lender paid mortgage insurance. LPMI is a measure in place where the lender can raise your interest rate to cover the cost of the PMI. In most cases the payments are lower than those with a lower rate and with PMI.
Rely on your licensed lending professional to provide the best guidance possible.
Steve Rockefeller, NMLS ID 659493, is a 24-year-mortgage lending professional. He is a past president of the Tidewater Mortgage Bankers and the Virginia Mortgage Bankers associations. Rockefeller can be reached at 757-301-9776 or [email protected]. This column is relative to the mortgage industry and the opinion of Rockefeller and does not reflect the opinion of George Mason Mortgage LLC.