Understand Mortgage Down Payments and PMI

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Clearing the down payment hurdle

Most home loans require some sort of down payment in order to qualify for a loan (a VA loan is the only home loan that does not require a down payment). While you can put down a minimal amount of money, such as with an FHA loan, the more you’re able to put down, the more money you’ll save in interest over the life of the loan.

How much should I put down?

To avoid paying for private mortgage insurance, or PMI, you’ll need to put down 20% of the purchase price of the home. However, 20% is not required to buy a home, it’s simply recommended in order to avoid the added expense of PMI.

FHA loans require the smallest amount down – just 3.5%. If you purchased a home with a purchase price of $200,000, for example, you would need to come up with 3.5%, or $7,000. Keep in mind, though, that you will also need to pay for closing costs.

Conventional loans require a minimum down payment of 3%. However, because you’re putting down less than 20%, you’ll still be required to purchase PMI.

See Understand Down Payments and PMI

What is private mortgage insurance?

Private mortgage insurance, or PMI, is required on most home loans with a down payment of less than 20%. It protects the lender in case you were to default on your loan.

FHA loans are the most expensive when it comes to mortgage insurance. Because of the low down payment, borrowers will pay an upfront mortgage insurance premium (UFMIP) of 1.75%. They are also required to pay an FHA mortgage insurance premium on an annual basis, typically 0.85% of the loan amount. With FHA loans, the annual MIP lasts the life of the loan if you choose to make only the 3.5% down payment when you purchase the home.  

While VA loans do not require a down payment, lenders do charge borrowers a funding fee of 1.25% to 3.3%. The amount of the funding fee will depend on whether this is your first time using your VA home loan benefit, what type of veteran you are and how much you are putting down. There is no annual mortgage insurance with VA loans, and the funding fee can be rolled into the total loan amount.

Conventional loans do not have an upfront MIP but charge an annual fee ranging between 0.15% and 1.95% of the loan amount. There are a number of different companies that offer mortgage insurance for conventional loans, more commonly known as private mortgage insurance or PMI. The monthly amount will depend on how much you put down, what your FICO score is, the term of your loan (15-year, 20-year or 30-year) and whether you are getting a fixed-rate or adjustable-rate mortgage. Once your mortgage balance is at 80% of the home’s value, you can call to have the PMI removed. Note that PMI will be automatically removed on conventional loans once your loan-to-value falls to 78%.

USDA loans do not have an upfront mortgage insurance premium, but instead have an upfront guarantee fee of 1% and and an annual fee of 0.35% for purchase and refinance transactions.

Mortgage insurance comparison

PROGRAM UPFRONT CHARGE ANNUAL CHARGE (TYPICAL)
FHA 1.75% .85%
VA 1.25%-3.3% 0
USDA 1.00% .35%
Conventional 0 .15%-1.95%

What else should I know?

The type of loan you get, the size of your down payment and your interest rate will all greatly affect the size of your monthly payment and how much you are paying in interest and fees over the life of the loan. In order to get the best deal for your situation, it’s important to comparison shop different lenders. At LendingTree, we do the work for you by finding the best lender for your specific situation.

And the proof is in the numbers: Borrowers who compare mortgage offers could save more than $30,000 over the life of a $300,000 loan. That’s a massive potential savings, and all it takes is shopping around to find it.

Ready to get started? View multiple offers here!