FHA vs. Conventional Private Mortgage Insurance

When you're getting ready to shop for a home loan, you'll hear the term private mortgage insurance (PMI). And on an FHA loan — it's called a mortgage insurance premium (MIP). In this article, we'll discuss what PMI is, and how it compares between an FHA loan vs. a conventional loan. And, most importantly, how to get rid of it. Read on to learn everything you need to know about PMI so that you can choose the right mortgage for you today and tomorrow.

Private mortgage insurance is not homeowner's insurance. It's in addition to homeowner's insurance, which you will need. PMI insures the lender — not the borrower. The only advantage PMI has for a borrower is that they can put down a smaller down payment. Let's expand on that.

For a conventional mortgage, you'll need to have a 20% down payment of the sales price to avoid PMI. So, if you're purchasing a $300,000 home, you'll need $60,000. That's not an easy feat for most people. Both conventional and FHA loans offer mortgage programs with a low down payment. You can get into a conventional loan for as little as 3-5% down. And FHA has a low down payment requirement of 3.5%.

But this low down payment creates a problem for the lender. The lower the down payment, the higher the risk of default. That's where the PMI comes in. The PMI protects the lender in case the borrower defaults. With that guarantee, lenders are more willing to loan their money because their risk is lower.

How much is private mortgage insurance?

The average PMI costs between 0.5 and 1% of the mortgage amount per year. On a $300,000 loan, a borrower could expect to pay somewhere between $1,500 and $3,000 per year. That amount is split up into 12 monthly payments.

The rate you pay depends on your credit score, down payment amount, lender, and loan program.

PMI on Conventional Loan

One of the best things about conventional PMI is that you can ask your lender to remove it once you have 20% equity in your home. But if you're credit isn't stellar, it may be challenging to get a conventional loan. That's why some borrowers with a credit score under 700 take out FHA loans.

PMI on FHA Loan

Now let's go over FHA loans. There are many great things about this government-backed mortgage. The rates are very low. In fact, in most cases, they are lower than conventional rates. Plus, the underwriting guidelines aren't as strict. So, borrowers can have lower credit scores and higher debts than those getting conventional loans.

All FHA loans have a monthly mortgage insurance premium (MIP). It's the same concept as PMI. This is insurance for the lender in case of default. But there's a big difference between FHA's MIP and conventional PMI. With PMI, you can remove it once you have 20% equity. With MIP, it's there for the life of the loan. It didn't always use to be that way. The rule changed in 2013. For loans going forward, MIP remained for the life of the loan.

How to Get Rid of PMI and MIP

If you have a conventional loan, once you have at least 20% equity, you can ask your lender to remove the PMI. When you have 22% equity of the home's original appraised value, the lender should automatically remove it — but you still may need to ask.

The only way to get rid of MIP is to refinance into a conventional loan. All FHA loans have MIP, and the lender will not remove it no matter how much equity you have.

That's one of the significant advantages of a VA loan. If you're an eligible veteran, service member, or surviving spouse, you can get into a home with zero down, and there's no PMI.

Mortgage Calculator with PMI and Taxes

When you begin shopping for a mortgage if you don't have 20% to put down, check out the difference between FHA loans with MIP and conventional loans with PMI. Sometimes the FHA loan is still a better deal even with the private mortgage insurance because it can be lower than conventional. That's especially true if your credit score is under 700.

Here are two examples for illustration purposes only. But you can see here how the rate and private mortgage insurance can make a big difference in your payment.

FHA Loan Example:

• Sales price = $300,000
• Down payment - $10,500
• Interest rate = 3%
• Total payment = $1,754

Conventional Loan Example:

• Sales price = $300,000
• Down payment - $10,500
• Interest rate = 3.250%
• Total payment = $1,851

From above, you can see how it's smart to shop and compare loan programs, especially when you have a small down payment.

The professional mortgage team at PenFed hopes you've enjoyed this information about PMI on FHA loans vs. PMI on conventional loans. Please keep us in mind the next time you need a new mortgage or are thinking about refinancing.