Mortgage insurance is often a necessary evil when you get a Federal Housing Authority mortgage. The FHA, which is a part of the United States Housing and Urban Development agency, requires you to carry mortgage insurance on its loans. It must because it's the agency that pays the lender if you fail to meet your payment obligations.
FHA loans serve as an alternative mortgage for people unable to make the 20 percent down payment required by most conventional lenders. FHA loans can be done with as little as 3.5 percent down. Because your investment is much less than 20 percent, you have less to lose if you default on the loan. The lender, however, is still on the hook for the loan, which is why the lender will pay a high premium.
The extend of the premium depends on the amount of your loan. The upfront fee for all borrowers is 1.75 percent of the loan amount. For a $100,000 loan, that comes out to $1,750. This is normally added to your loan amount so you don't have to pay cash. Annual premiums on loans greater than 15 years range from 1.2 to 1.5 percent of the loan. They're .35 to .85 percent on loans running fewer than 15 years. You pay these premiums over 12 months in your monthly mortgage payments.
Long Loan Terms
If your repayment period goes beyond 15 years, you have to pay the MIP for at least that long no matter how much equity you have in the home. In some circumstances, with private mortgage insurance, you can waive the premiums once your loan-to-value is 78 percent or less.
Short Loan Terms
You could waive your premiums sooner rather than later with a 15-year loan term with a 10 percent down payment. In this scenario, the annual premiums are automatically waived once you reach the 78 percent loan-to-value ratio. The only way to avoid MIP is to make a down payment of at least 20 percent on a 15-year loan term.
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