The old adage when it came to getting a mortgage was that you absolutely had to have a 20% down payment. While this may have been true for our parents and grandparents, it’s no longer the case. In recent years, it’s been possible to get a home for as little as 3% down.
Of course, there are advantages to a higher down payment. Responsible lending is all about risk management. If you make a higher down payment, you can get a better rate because the lender doesn’t have to put up as much capital. Another way lenders manage risk is through mortgage insurance.
Most loans with less than a 20% down payment or equity stake will require some form of mortgage insurance, but just because you need it doesn’t mean you should pay more than you have to. In fact, if you get a conventional loan with monthly borrower-paid mortgage insurance (BPMI) payments, Quicken Loans is offering industry leading rates.
Whether you’re looking to buy or refinance, we’ll go over what a difference your mortgage insurance rate makes. Before we get into that, let’s get back to basics so you can cut through the terminology.
What’s Mortgage Insurance?
You may hear the term mortgage insurance thrown around when you’re going through the application process for your loan, but what is it and what does it cover?
Mortgage insurance is mandatory for most loans with less than a 20% down payment or amount of equity. In exchange for making a lower down payment, the mortgage insurance helps protect the lender in the event that something happens that causes you to default on your home.
Mortgage insurance comes in several different forms. The mortgage insurance on conventional loans from Fannie Mae or Freddie Mac is known as private mortgage insurance (PMI). There are also a couple of different types of PMI, but we’ll come back to that in a minute.
FHA loans have mortgage insurance rates that are set by the government and don’t change. Referred to as mortgage insurance premiums, or MIP, there are upfront premiums that are collected at closing or built in to the loan, as well as monthly mortgage insurance premiums. Depending on the size of your down payment and when the loan closed, it’s a good bet that these will stick around for the life of the loan.
“Life of the loan” is a key phrase here. If you qualify, once you reach 20% equity, you can refinance out of an FHA (or…