I wanted to provide some insight into MIP – Mortgage Insurance Premiums. These are those pesky little fees that get added to your loan (and often upfront fees as well) to give the lender “insurance” in case you don’t pay your loan. You are slapped with these fees when you do not put enough “skin” in the game. To avoid these fees a 20% down payment would be required. In recent years the rules have changed regarding MIP, depending upon the type of loan. Here’s a snippet of the fees charged by different types of loans:
(We will use a loan amount of $200,000 based on a 30 year term for these examples)
FHA: FHA requires only 3.5% down. However, for this lower down-payment, you will pay 1.75% up front MIP and .85% for the life of the loan. So, using the figures above, you would pay an upfront fee of $3500 at closing and $141.66 per month for this insurance. FHA has loan limits but they are higher than you might expect.
USDA: USDA is only allowed in rural areas, all of our local area qualifies. It will allow you to put 0 down. You will pay a 1% upfront fee and .35% for the life of the loan. This would result in $2000 upfront fees at close and $58.33 per month. Less than FHA, but they do have income restrictions you have to fit within.
VA: VA requires only an upfront fee – called a Funding Fee – which varies based on length of service, down payment and type of home, and can even be waived for certain situations.
Conventional: Conventional loans have come a long way. They now offer as little as 3% down payment. The MIP fees are based on your credit score and down payment, so I am unable to provide an example. However the good news with the conventional loan is the ability to stop paying the MIP payments once you have 20% equity in your home (with a 2 year minimum payment required). You can get to the 20% many ways – by paying down the loan or if you are in an area that is experiencing rising home values, such as ours, your home value is going up yearly in addition to your payments.
There are, of course, exceptions to every rule, and I understand the government is looking at the regulations regarding this very issue and may make changes in the near future. As you can see, once Conventional Loans dropped their required down payment, they made real competition for the government backed loans. For now, if you can, Conventional would be the cheapest loan in the long run in most instances. As always, I recommend you talk to a good lender to find out which loan type works best for your situation.