MORTGAGE INSURANCE INFORMATION
Mortgage insurance is an additional monthly and upfront cost to the borrower. The cost will vary depending on the loan program. On the three major government programs – FHA, VA, and USDA, the mortgage insurance premiums are set at a fixed amount and are not impacted by credit score but will vary depending on the down payment and loan term. On conventional loans, mortgage insurance premiums will fluctuate depending on credit score, down payment, and loan program.
WHAT IS THE PURPOSE OF MORTGAGE INSURANCE
Essentially mortgage insurance protects the lender in case of a foreclosure or other default event. There is no benefit to the borrower to pay mortgage insurance but it is an important part of the mortgage industry because it has given lenders the opportunity to be more lenient with their lending guidelines and requirements. In the past, a homebuyer would need to put down 20%+ to purchase a home but the creation of mortgage insurance allows banks to offer mortgage programs with smaller down payments, higher debt-to-income ratios, etc. Even though paying mortgage insurance seems like an unnecessary cost, overall it has helped hundreds of thousands of people become new homeowners who otherwise would not have been able to come up with a large down payment.
TYPES OF MI
There are lots of different mortgage insurance programs and the cost will vary depending different factors. Conventional loans have PMI (Private Mortgage Insurance). This fee goes to private insurance companies who offer protection to banks. Other programs like FHA have MIP (Monthly Insurance Premium). Since FHA is a government program, the premium goes to the government because they are providing the insurance. For the borrower, there will be no difference in who covers the insurance. At the end of the day, the cost gets passed on to them and they’re responsible for paying the premiums.
CONVENTIONAL (Private Mortgage insurance | PMI)
Upfront Cost
Conventional loans typically do not have upfront mortgage insurance but a borrower is able to buyout the monthly mortgage insurance by paying a one-time upfront fee or they can remove the mortgage insurance by rolling it into the interest rate (higher interest rate). We do not recommend rolling the MI into the interest rate because over time, it will end up costing more.
Monthly Cost
Assuming a borrower chooses not to buyout the mortgage insurance, monthly premiums will vary depending on the program, down payment, debt-to-income ratio, and credit score. Since private mortgage insurance is based on risk, a bigger down payment and/or higher credit score can have a dramatic impact on the cost. On a home purchase, MI is only required if a borrower is doing less than 20% down, and on a refinance, less than 20% equity. The closer that a borrower is to the 20% down payment/equity position, the cheaper the MI. It is calculated in brackets of 5%. For example if someone is doing 5% down, their mortgage insurance premium would be the same as someone who is putting down 8%. At 10%, there would be a discount. Also, some programs intended for first time homebuyers like HomeReady & Home Possible, will offer lower insurance premiums. Private mortgage insurance is removable once a borrower has 20% -22% equity.
FHA (MIP)
In 2023, FHA reduced their monthly mortgage insurance premiums to help with the rise of mortgage rates. This makes FHA loans more attractive to new homebuyers and in some cases a better option than a conventional loan. The cost of upfront and monthly mortgage insurance is a percentage of the loan amount. FHA mortgage insurance is not impacted by credit scores. All borrowers will pay the same premiums although down payment and loan term will be a factor.
Upfront Cost
1.75% of the loan amount. No matter what term or loan amount, the upfront FHA premium is 1.75% of the loan amount. This fee is considered to be a closing cost but does not need to be paid out of pocket. It can be rolled into the loan or paid by the seller, lender, builder, or realtor. For example on a $400,000 loan amount, the mortgage insurance will be $7,000 ($400,000 x .0175 = $7,000). If upfront mortgage insurance is rolled into the loan, it will increase the APR (annual percentage rate) of the loan since the consumer will pay interest on that amount over time.
Monthly Cost
For Terms Above 15 Years (20, 30 Year Fixed, etc)
Loan amounts under $726,200
- Less than 10% down payment = .55% for life of the loan. (Mortgage insurance can only be removed with refinance)
- 10%+ Down Payment = .50% for 11 years. (Can be removed after 11 years and 22% equity
Loan amounts over $726,200 (For high-cost Counties)
- Less than 10% down payment = .75% for life Mortgage term. (Mortgage insurance can only be removed with refinance)
- 10%+ Down Payment = .70% for 11 years. (Can be removed after 11 years and 22% equity)
Term of Less Than or Equal to 15 Years (15 Year Fixed or Less)
Loan amounts under $726,200
- Less than 10% down payment = .40% for life of the loan. (Mortgage insurance can only be removed with refinance)
- 10%+ Down Payment = .15% for 11 years. (Can be removed after 11 years and 22% equity)
Loan amounts over $726,200 (For high-cost Counties)
- Less than 10% down payment = .65% for life Mortgage term. (Mortgage insurance can only be removed with refinance)
- 22%+ Down Payment = .15% for 11 years. (Can be removed after 11 years and 22% equity)
- Less than 22% down payment but over 10% = .40% for 11 years. (Can be removed after 11 years and 22% equity)
VA FUNDING FEE (Effective April 2023)
VA does not charge monthly mortgage insurance, only a one-time upfront fee. This fee does not need to be paid out of pocket. It can be rolled into the loan or potentially paid by 3rd party. Veterans who have a VA-related disability may be exempt from the funding fee. See below for details.
**Rates for Veterans, active-duty service members, and National Guard and Reserve members**
Upfront Funding Fee if using VA for the first time (first-time buyers):
- Less than 5% down payment | 2.15% of the loan amount
- 5% or more down payment | 1.5% of the loan amount
- 10% or more down payment | 1.25% of the loan amount
Upfront Funding Fee for 2nd-time use (cash-out refinance or additional home purchase):
- Less than 5% down payment | 3.3% of the loan amount
- 5% or more down payment | 1.5% of the loan amount
- 10% or more down payment | 1.25% of the loan amount
- Interest Rate Reduction Refinancing Loans (IRRRLs) | Streamline refinance – 0.5% of the loan amount
VA borrowers may be exempt from the VA funding fee if:
- They are receiving VA compensation for a service-connected disability, or
- Eligible to receive VA compensation for a service-connected disability, but receiving retirement or active-duty pay instead, or
- Receiving Dependency and Indemnity Compensation (DIC) as the surviving spouse of a Veteran, or
- A service member who has received a proposed or memorandum rating before the loan closing date that says you’re eligible to get compensation because of a pre-discharge claim, or
- A service member on active duty who, before or on the loan closing date, provides evidence of having received the Purple Heart
USDA GUARANTEED FEE
USDA mortgage insurance premiums are set by the Department of Agriculture and will not change due to credit scores or down payment. The upfront and monthly MI are less expensive than FHA, and in some cases will also be less than conventional loans. Mortgage insurance is not removable and is for the life of the loan.
Upfront Cost
- 1% of the loan amount
Monthly Cost
- .35% of the loan amount