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 percent of the purchase price of the home. However, 20 percent 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 percent. If you purchased a home with a purchase price of $200,000, for example, you would need to come up with 3.5 percent, 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 five percent. However, because you’re putting less than 20 percent down, 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 percent. 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 (MIP) of 1.75 percent. They are also required to pay for FHA mortgage insurance on an annual basis, typically 1.35 percent of the loan amount. With FHA loans, PMI lasts the life of the loan unless the borrower chooses to refinance once more equity is built up in the home.

While VA loans do not require a down payment, lenders do charge borrowers an upfront fee of 1.25 to 3.3 percent. There is no annual mortgage insurance with VA loans, and the upfront fee can be rolled into the total loan amount.

Conventional loans do not have an upfront MIP, but charge an annual fee ranging between 0.27 and 0.62 percent of the loan amount. Once your mortgage balance is at 80 percent 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 percent.

Mortgage insurance comparison

FHA 1.75% 1.35%
VA 1.25%-3.3% 0
USDA 2.00% .50%
Conventional 0 .27%-.62%
Community 0 0.60%

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 that compared two different mortgage offers could save up to $11,000 over the life of the loan. Those that compared three offers could save $16,000, and those that compared five offers? A whopping $24,000 saved over the life of their loan.

Ready to get started? View multiple offers here!