FHA vs. Conventioal Mortgage Insurance!

FHA Mortgage Insurance vs. PMI: What’s the Difference?

When you’re buying a home with less than 20% down, you need to know about the types of mortgage insurance that may apply. Two common types of mortgage insurance are FHA Mortgage Insurance and Private Mortgage Insurance (PMI), but each has its own quirks that will impact your loan choice. Let’s get into the details.

What is FHA Mortgage Insurance?

FHA Mortgage Insurance is required on all FHA loans which are insured by the Federal Housing Administration. This insurance protects the lender if the borrower defaults. FHA Mortgage Insurance has two parts:

1. Upfront Mortgage Insurance Premium (UFMIP) – 1.75% of the loan amount, paid at closing (can be rolled into the loan).
2. Annual Mortgage Insurance Premium (MIP) – monthly premium. Rate varies by loan amount, term and loan-to-value (LTV) ratio.

One of the big differences of FHA mortgage insurance is that it’s usually permanent unless you can refinance into a conventional loan.

What is Private Mortgage Insurance (PMI)?

PMI applies to conventional loans when the down payment is less than 20%. Unlike FHA insurance, PMI is provided by private insurers and has more flexibility. Here’s how it works:

• Monthly Payments – PMI is usually paid monthly, but some lenders offer a single upfront premium or a combination of upfront and monthly premiums.
• Cancellation – One of the big advantages of PMI is that it can be cancelled when you reach 20% equity in your home. This makes it a potentially less expensive option if you plan to stay in your home and build equity.

Which One is Better for You?

The choice between FHA Mortgage Insurance and PMI depends on your situation and goals:

• If you have a lower credit score or small down payment, FHA may be easier to qualify for, but the mortgage insurance costs add up over time.
• If you want flexibility and to be able to cancel insurance, PMI on a conventional loan could save you money as you build equity.

Conclusion

Both FHA Mortgage Insurance and PMI serve the same purpose – to protect the lender in case of default. But they differ in cost, cancellation options and credit profiles. Talk to a knowledgeable mortgage professional, like myself, to determine which one is right for you.