If you are thinking about buying a home, an FHA home loan might be the right program for you. Private Mortgage Insurance is a component of FHA home loans that you will want to know about if you decide to go with the FHA loan program. Below, we answer some common questions that you might have about Private Mortgage Insurance.

What is Private Mortgage Insurance?

Private Mortgage Insurance, or PMI, is a fee that is charged to borrowers who have a down payment of less than 20% of the purchase price of the home they are buying. The amount of Private Mortgage Insurance you pay depends on the purchase price of the home you are buying and is calculated as a percentage of that price. For FHA loans, Private Mortgage Insurance works a little differently than with other loan programs.

Is Private Mortgage Insurance Required on FHA Home Loans?

Private Mortgage Insurance is required on FHA loans. There is also an up-front fee of 1.75% that is included in the loan itself. If you happen to refinance to another FHA loan within 3 years, you would be eligible for a pro-rated refund of this fee. For Private Mortgage Insurance, how much you have to pay depends on how much you are putting down. The factors can vary from 3.5-5.0% of the purchase price. The cost of Private Mortgage Insurance is built into your monthly mortgage payment.

Why is Private Mortgage Insurance Necessary?

Private Mortgage Insurance is used to protect the investor on a loan in the event that the borrower defaults on their payments and the home goes into foreclosure. In that worst-case scenario, the Private Mortgage Insurance would be used to help repay part of the loan balance that would be lost in the next sale.

Will I always have to pay Private Mortgage Insurance?

Private Mortgage Insurance stays on for the life of the loan, unless you are putting more than 10% down. If that is the case, your Private Mortgage Insurance will drop off the loan after 11 years.

Here is a table outlining the different Private Mortgage Insurance coverage options:

Annual FHA Private Mortgage Insurance

Understanding Private Mortgage Insurance and how it relates to FHA home loans can seem daunting, but knowing the answers to the basic questions we proposed above will help you in deciding which loan program is right for you. Ask your loan officer if you have any other questions, and they will be able to help you on your journey to homeownership.

Michael Vanella

Michael Vanella

Mortgage Loan Originator at USA Mortgage Home Loans