Are you thinking about using mortgage financing to buy a new home? If so, you’ve likely heard about mortgage insurance policies requirements and you may be wondering how they will affect you. In today’s blog post we’ll explore mortgage insurance and explain the difference between conventional, FHA, VA and USDA mortgage insurance policies.
How Does Private Mortgage Insurance or “PMI” Work?
While there are a number of reasons that your lender may require mortgage insurance, in general you’ll be required to purchase a conventional PMI policy if you are putting less than 20 percent of the home’s value in as a down payment. Another way your lender might explain this is that you have a “loan to value” or “LTV” ratio of higher than 80 percent, which means that the amount of your loan divided by the value of your home is higher than 0.8.
The cost of your private mortgage insurance policy will vary depending on a number of factors, such as your financial situation, FICO credit score, the cost of your home and more. Generally speaking you’ll be required to pay from one-half to one percent of the cost of your monthly mortgage payment in insurance fees. Once your LTV ratio moves below 80 percent you may no longer be required to pay for PMI.
How Does VA Mortgage Insurance Work?
If you qualify for a mortgage from Veterans’ Affairs you’ll be pleased to know that you won’t be required to pay for mortgage insurance. In some instances you actually won’t be required to pay a down payment either, meaning that you may be able to borrow up to $400,000 to purchase a home without having to invest a cent of your own capital.
How Does USDA Mortgage Insurance Work?
Did you know that the Department of Agriculture runs a mortgage program? The USDA Rural Development mortgage offering is government-backed and like the VA mortgage program above you can finance 100 percent of the cost of your home without investing a down payment. However, unlike the VA program you’ll be required to pay for mortgage insurance. Currently the annual mortgage insurance premium on USDA loans is 0.5 percent.
How Does FHA Mortgage Insurance Work?
Finally, don’t forget about the Federal Housing Administration’s mortgage program. If you qualify for a FHA-backed mortgage, you’ll be paying about 1.35 percent in mortgage insurance premiums if you make the minimum down payment.
As you can see, there is a bit of a learning curve involved with fully understanding how all of the different types of mortgage insurance work. To learn more about mortgages and how insurance can benefit you, contact your local mortgage professional today.
ShareDEC
About the Author:
Babak Moghaddam graduated from University of Southern California in 1985. He entered the mortgage industry as a compliance auditor at the Bank of New York in 1986 and completed his masters in Business Administration two years later. After seventeen years in the traditional mortgage banking world Babak finally transformed this vision into his own practice in 2002 when he formed Charter Pacific Lending Corp, a mortgage company that has provided over $900 Million in residential real estate loans throughout Southern California. Babak and his team do things a little differently than other mortgage providers. They work as financial advisors, because they have come to realize that a mortgage is a very powerful financial tool. And just like any other financial tool, it should be managed as part of the overall financial management plan to reach every home owner’s long and short-term financial goals much faster. You can contact Babak for a free consultation and strategy session at (800) 322-1217 X103.