As I discussed last week, mortgage insurance is a necessary evil for many prospective home buyers, especially those who are first time home buyers. It is a tool which allows individuals to buy the home of their dreams even if their credit is less than perfect or their down payment is less than 20 percent. This insurance can be utilized in conjunction with either a conventional or FHA mortgage, and is calculated differently for each. And while the insurance itself should not be the primary determining factor for which type of mortgage you use to finance your home, understanding the basic differences can go a long way in helping you understand what you are paying for.
The first thing to consider is the differences in upfront costs. FHA mortgages have a required upfront cost of 1.75%. This means that 1.75% of the value of your home will be paid in an upfront fee to the government in order to finance your home. And while this sounds like a lot, in the grand scheme of things, it’s really not. It is $1,750 for every 100,000 you borrow, which amounts to roughly $4.80 per month over 30 years. But, conventional mortgage insurance does not have an upfront requirement. And no cost is always cheaper than low cost.
The second part of mortgage insurance is the annual component. In each of your payments for the time in which you have mortgage insurance, you will pay a percent of your loan in insurance costs. For traditional loans, this will typically range from 0.5% to 1% of the original amount mortgaged, whereas the cost for FHA loans ranges from 1.3% to 1.35% on 15-30 year mortgages. Further, once your home has at least 22% equity (you owe less than 78% of what your home was purchased for), conventional mortgage insurance usually goes away automatically. FHA insurance, on the other hand, never goes away. But once you perceive to have 20% equity with a conventional, you can refinance (often at little or no cost) out of the loan and avoid the mortgage insurance, or you can contact your loan servicer and ask them about their procedure for removing your mortgage insurance, should you want to keep your current interest rate.
Any way you slice it, mortgage insurance is an added expense, but it is one that gives you access to your home faster. For more information on how to calculate the mortgage insurance on a house you are considering buying, please contact me. And if you would like to add anything about the differences between FHA and conventional mortgage insurance, please leave a comment.