Demystifying Mortgage Insurance

For about 8 or so years prior to 2008, mortgage insurance wasn’t something most people getting a home loan had to worry about.  If a borrower was putting less than 20% down, in most cases they would get a 1st mortgage for 80% and then a 2nd mortgage for 5-20% of the remainder of the price, depending on how much they were putting down.

Now let’s fast-forward to 2009 and the current climate for home mortgages in the U.S.  There are currently NO 2nd mortgages available that will go over 80% of the purchase price or value of your home.  So if you want to put less than 20% down on a home you have to get mortgage insurance.  This article will explain mortgage insurance for FHA home loans and conventional home loans.

 

Mortgage Insurance using FHA Home Loans

With an FHA loan there are 2 types of mortgage insurance.  Upfront mortgage insurance that can be either paid up front or rolled into the new loan balance, and monthly mortgage insurance that is paid monthly.  With an FHA loan the monthly mortgage insurance must be paid for 5 years minimum.  Then after 5 years if your loan balance is 80% or less than the value of your property, you can have the mortgage insurance eliminated.

 

Here’s a chart of the mortgage insurance for FHA loan purchases:

 

Down payment	Upfront mortgage insurance	Monthly mortgage insurance
<5% down payment	1.75% of the loan balance	.55% of the loan balance
>5% down payment	1.75% of the loan balance	.50% of the loan balance

You get a break on mortgage insurance with a FHA loan if you get a 15 year fixed vs. a 30 year fixed mortgage when you purchase.  The upfront mortgage insurance on a 15 year fixed FHA loan is still 1.75%, but the monthly mortgage insurance is .25% if you put <5% down, and there is NO monthly mortgage insurance if you put >5% down using a 15 year fixed FHA loan.

 

Here’s a chart of different loan balances and what the upfront and monthly mortgage insurance would be using an FHA loan to purchase:

 

Initial loan balance and down payment	Upfront mortgage insurance	New loan balance after up front mortgage insurance	Monthly mortgage insurance
$200,000 <5% down payment	$3,500	$203,500	$93/mo
$250,000 <5% down payment	$4,375	$254,375	$116/mo
$300,000 <5% down payment	$5,250	$305,250	$139/mo
$350,000 <5% down payment	$6,125	$356,125	$163/mo

 

When you refinance an FHA loan to another FHA loan with a streamline refinance to lower your rate, the upfront mortgage insurance is 1.5% and the monthly mortgage insurance is the same as a purchase loan.  You are also refunded a percentage of the original upfront mortgage insurance you paid when you purchased.  How much you are refunded depends on how long ago you purchased.

 

Remember, you can pay the upfront mortgage insurance up front if you don’t want it added to your loan balance.  Or even better, with a purchase, try to negotiate with the seller to credit you to pay the upfront mortgage insurance.  FHA allows up to a 6% credit from sellers to pay a buyers closing costs.  

 

Mortgage Insurance using Conventional Home Loans

With Conventional home loans there is no upfront mortgage insurance, but slightly higher monthly mortgage insurance.  With a conventional loan once the mortgage balance becomes less than 80% of the value of the property, the monthly mortgage insurance is eliminated. 

I will provide general estimates in the chart below for conventional loan mortgage insurance for borrowers with good credit on primary residence purchases using 30 year fixed rate mortgages.  There are a lot more variances with conventional mortgage insurance depending on credit score and other factors.

Here is a chart of monthly mortgage insurance using a conventional loan:

 

Down payment	Monthly mortgage insurance % of the loan balance
5%	.94%
10%	.62%
15%	.44%

 

Here’s a chart of different loan balances and what your monthly mortgage insurance would be using a conventional loan to purchase:

 

Down payment	$200,000 loan balance	$300,000 loan balance	$400,000 loan balance
5%	$152/mo	$223/mo	$297/mo
10%	$93/mo	$139/mo	$165/mo
15%	$62/mo	$93/mo	$124/mo

 

Keep in mind that conventional loans with mortgage insurance have much tighter underwriting guidelines and credit requirements than FHA loans.  And in certain states, mortgage insurers require a minimum of 10% down payment.

Also something to remember, mortgage insurance is currently tax deductible.  Please discuss this with your tax preparer for more details.

 

I hope this article has helped you to understand how mortgage insurance works with FHA home loans and conventional homes loans.  Feel free to email or call us to discuss any aspects of getting an FHA or conventional loan to purchase or refinance.

Warm Regards,

Rob Chomentowski

Sr. Loan Officer

858-922-7899 (direct)

rob@affinity-financial.com

www.socalfhahomeloans.com

 

 

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