How Can I Pay Less For Mortgage Insurance?

Lenders require mortgage insurance when borrowers are unable to put at least 20 percent down when buying a home. The good news is that in some instances it may be possible to reduce mortgage insurance costs.

Mortgage insurance comes in three basic flavors, FHA, VA and private mortgage insurance (MI). Let’s look at each.

FHA Mortgages

If you get an FHA loan you must pay two types of a mortgage insurance premium (MIP): the up-front fee and the annual fee.

On January 21st the FHA announced that it was increasing up-front premiums as of April 1, 2010. The new schedule will look like this:

___ Purchase Money Mortgages and Full-Credit Qualifying Refinances = 2.25 percent

___ Streamline Refinances (all types) = 2.25 percent

___ HOPE for Homeowners (Delinquent Mortgagors) = 2.00 percent

___ Home Equity Conversion Mortgages = 2.00 percent

The rate for the annual FHA premium is unchanged at .55 percent on the outstanding loan balance for those who buy with less than 5 percent down.

However, you can cut your FHA premium to .50 percent if you buy with at least 5 percent down.

VA Mortgages

With the VA mortgage insurance program the insurance premium is called a funding fee. The VA explains the fee this way:

“The VA funding fee is required by law. The fee is intended to enable the veteran who obtains a VA home loan to contribute toward the cost of this benefit, and thereby reduce the cost to taxpayers. The funding fee for second time users who do not make a down payment is slightly higher. The idea of a higher fee for second time use is based on the fact that these veterans have already had a chance to use the benefit once, and also that prior users have had time to accumulate equity or save money towards a down payment. First and second time users who make a down payment of at least 5 percent pay a reduced funding fee of 1.5 percent, the same as first time users making the same down payment. For a 10 percent down payment, the fee drops to 1.25 percent. The effect of the funding fee on a veteran’s financial situation is minimized since the fee may be financed in the loan. National Guard and Reservist veterans pay a slightly higher funding fee percentage.”

At this time the VA funding fee schedule looks like this:

VA Purchase And Construction Loans

VA Cash-Out Refinancing Loans

(* The higher subsequent use fee does not apply to these types of loans if the veteran’s only prior use of entitlement was for a manufactured home loan.)

Other Types Of VA Loans

As with private-sector mortgage insurance, if you pay a little more down you can cut your up-front VA funding fee. However, notice that unlike the FHA or private mortgage insurance companies the VA does not have an annual fee so the benefit of a bigger down payment is limited in the sense that it cannot reduce annual fees since there are none.

Conventional Mortgages

With conventional mortgage financing the lender will select a private mortgage insurance company if you buy with less than 20 percent down and the borrower will pay the bill. Given who pays and who benefits, there’s not much incentive for the lender to seek the least costly source of private mortgage insurance.

That said, there are several ways to reduce your MI costs.

First, your rate will be lower if you finance with a fixed-rate loan rather than an ARM.

Second, your rate will be lower if you put more down — 10 percent instead of 5 percent and 15 percent instead of 10 percent.

Third, in some cases it may be possible to pay for MI insurance in a single premium — with a lump sum. This may or may not be cheaper than annual payments, depending on how long the loan is outstanding.

Fourth, you can buy private mortgage insurance with a lump sum and with a possible refund. However, the policy is cheaper if no refund is allowed.

For details, changes and specifics, please speak with lenders.

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