Private mortgage insurance (PMI) is required on all home loans, whether they're applied to non-government (conventional) or Federal Housing Administration (FHA) mortgages, where the borrower puts less than 20 percent down. The insurance is charged to repay the lender if the borrower defaults on the loan. The cost of monthly insurance premiums and length of time a borrower pays them can greatly influence consumer decisions about the best loan for a new home or refinanced mortgage.
FHA Loans vs Conventional Loans
FHA-backed loans have traditionally offered advantages of lower down payments and more favorable interest rates than those on conventional loans. It has also been easier for some applicants to meet FHA qualification requirements, especially when it comes to down payments and pocket cash. But on the distaff side, the FHA insures loans – it doesn't make them. As a self-funded agency, it charges borrowers monthly insurance premiums for the life of the mortgage on all FHA loans originated from June 2013 forwards.
Key point: The only way to remove mortgage insurance on an FHA loan is to refinance it if you have built up sufficient equity to qualify for a conventional mortgage.
The FHA assesses two insurance premiums on borrowers:
- Upfront Mortgage Premium – currently at 1.75% of the base loan amount. The premium may be paid upon closing or, more typically, is rolled into the total mortgage cost payable in 12 monthly installments each year.
- Monthly Premium – based on the amount financed, the term of the loan and the amount rolled into the mortgage, including the upfront premium. View our FHA motgage insurance chart to get more information on how much you might expect to pay in monthly insurance premiums.
Borrowers taking out conventional loans will be required by lenders to pay mortgage insurance through a private company. The insurance requirement is waived for borrowers who can put down 20 percent of the loan at closing. Conventional loans can also be used to buy second homes or investment properties. The U.S. Department of Consumer Finance urges conventional loan applicants to fully understand the amount that PMI will add to monthly bills.
Compared with an FHA mortgage, PMI premiums are generally less expensive than the monthly FHA insurance premiums and PMI can be cancelled by the borrower once the principal balance on the home drops below 80 percent. The lender is required under the Homeowners Protection Act to automatically drop the PMI requirement on the date the principal balance drops below 78 percent of the original home value. The falling off of PMI can be an incentive for choosing a conventional loan over the FHA loan program.
One other advantage for conventional borrowers with good credit is that the premiums for PMI are in-part calculated based on credit scores and credit history. FHA insurance premiums have no scale based on the borrower's credit.
Caution: Homeowners that closed mortgages before July 29, 1999, should contact the consumer protection agency to determine if there are pertinent state laws that impact cancellation or early termination charges for PMI.
Because mortgage rates vary between conventional and FHA-backed lenders, consumers should use LendingTree's LoanExplorer to compare rates based on parameters such as loan type, zip code, estimated credit score, property value, and loan balance. Whenever comparing loans, be sure to enter the same set of parameters.