If you have an FHA Streamline where you go from one FHA loan to another for the purpose of lowering your rate and/or changing your term, the MIP rates are a little better. In this case, there’s an upfront rate of 0.01% of your loan amount and an annual MIP rate of 0.55%.
How Long Does MIP Last?
Unfortunately, if you purchased or refinanced with an FHA loan on or after and you had a down payment of less than 10%, MIP lasts for the term of the loan. With down payments of 10% or more, you still have to pay MIP for 11 years.
If you haven’t purchased or refinanced with an FHA loan since , the outlook is a little better. On a 15-year term, MIP is canceled when your LTV reaches 78%. For longer terms, the LTV requirement remains the same and you have to pay MIP for at least 5 years.
There’s one other way to stop paying these premiums if you’re currently in an FHA loan. Assuming you meet the other qualification factors (e.g. at least a 620 median FICO ® score), you can refinance into a conventional loan and request mortgage insurance removal once you reach 20% equity in your home.
PMI Vs. Guarantee Fees
Another mortgage option, a USDA loan , requires the borrower to pay a guarantee fee, which is similar to, but distinct from, mortgage insurance. USDA loans help reduce the cost for home buyers living in rural areas and in some suburban areas. As with FHA loans, rates are set by the government, but USDA rates are generally lower.
How Do Guarantee Fees Work?
Like the FHA’s mortgage insurance premium, guarantee fees are due upfront and annually. The upfront guarantee fee is 1% of your loan amount, either paid at closing or refinanced into the loan. The annual premium is equal to 0.35% of the average unpaid mortgage balance based on the original amortization schedule without making any extra payments, broken into 12 equal installments and paid month to month.
How Long Do Guarantee Fees Last?
The downside here is that guarantee fees live for the life of the loan. The only way to get rid of them is by refinancing into a conventional loan and requesting PMI removal after you reach 20% equity.
This isn’t common, but there are cases in which you can receive your loan directly from the USDA. In these instances, there are no guarantee fees.
Although PMI is for the protection of the lender and not the borrower, that’s not to say there aren’t debit card payday loans Wellsville OH some indirect benefits for the borrower. There are two big ones that we’ll go over here:
- PMI enables a lower down payment: Because PMI offsets some of the risk for lenders in the event that the borrower defaults, it enables down payments as low as 3%. Without PMI, you would need a minimum of a 20% down payment for a conventional loan. PMI allows you to accomplish homeownership faster.
- PMI is tax deductible: Congress has extended the mortgage insurance tax deduction through the 2020 tax year, so if you haven’t filed your taxes yet, this is still deductible. You report it along with your deductible mortgage interest from the Form 1098 you should have received from your mortgage servicer.
Even if you have the money for a 20% down payment, it may make sense to make a smaller down payment and opt for PMI depending on your financial situation and your other goals. It’s not necessarily a good idea to empty your savings.