The two most common loans available in the marketplace are Conventional loans and FHA Loans. FHA Loans are insured by the Federal Housing Administration and Conventional mortgages are backed by Fannie Mae and Freddie Mac.
When you use an FHA loan to purchase or refinance a house there is an upfront mortgage insurance premium calculated at 1.75 percent of the loan amount and that figure is financed into the loan. This can also be paid for in cash at closing.
When you use a Conventional Loan you can use a mortgage insurance premium that is almost like a gym membership where you prepay the PMI in full at which point your loan balance is bigger like the FHA scenario.
Frequently asked questions you should know…
Q: Why is my loan amount bigger? It doesn’t make sense because my purchase price and loan amount should be lower.
A: The loan amount is higher because you are electing to finance the premium for either an FHA Loan or for a Conventional Loan. The alternative would be to pay this amount in cash.
Q: Why does my FHA Mortgage have two mortgage insurance premiums? Why is there a monthly version as well?
A: The FHA requires two forms of PMI an “ufmip” which is an upfront mortgage insurance premium and then a monthly MIP typically based on .85 percent of the loan amount. The FHA charges these premiums as a byproduct of obtaining an FHA Loan.
Q: What’s the benefit of going with single pay mortgage insurance and financing my PMI?
A: You can save several hundred dollars per month when financing the PMI by electing to take a prepaid upfront premium on a conventional mortgage. By doing so you would be electing to not have it in your monthly mortgage payment. Monthly PMI that most lenders put borrowers into (because it’s easier for the lender) on conventional loans must remain for five years and then at 20 percent equity. It’s a “petition” to drop the monthly fee.
Q: How do I get my payment as low as possible while still being able to purchase the max amount of house?
A: By working with a minimum down payment of 10 percent you would greatly benefit using a Conventional Mortgage with single pay financed PMI. This may yield you another $50k to $70k more in borrowing power, enhancing your real estate agent’s ability to help you get into contract more easily. This scenario would support being able to purchase a house that otherwise may have been out of your reach while attaining a rock bottom affordable low payment. It is quite literally the best scenarios working with less than 20 percent down to buy a home.
Scott Sheldon is a local mortgage lender, with a decade of experience helping consumers purchase and refinance primary homes second homes and investment properties. Learn more at www.sonomacountymortgages.com