Navigating the Mortgage Insurance Maze

BY CHRIS JOHNSON

Two mortgage insurance terms that often confuse homebuyers are PMI, which stands for private mortgage insurance, and FHA mortgage insurance, a product associated with loans offered by the Federal Housing Administration. Let’s break them down in a way that’s easy to understand, which can help when choosing between those options.

PMI is a type of insurance policy that protects the lender in case you default on your mortgage loan. This insurance typically is required when a homebuyer makes a down payment of less than 20% of the home’s purchase price. Once you’ve built enough equity in your home — usually when your loan balance drops to 78% of the home’s original appraised value — PMI can be canceled, which can lower your monthly payment.

On the other hand, FHA mortgage insurance is a mandatory component for all FHA loans, regardless of your down payment size. This insurance comes in two parts: an upfront premium that’s paid at closing by being added to your loan amount and an annual premium that’s divided into monthly payments. Unlike PMI, FHA mortgage insurance can’t be canceled for most mortgages. This means you’re required to keep paying the insurance premium for the life of the loan or until you refinance into a non-FHA loan. Also, this year, FHA reduced the monthly premium. Depending on your down payment, it can be as low as 0.50%. This, along with the lower FHA mortgage rate, usually makes FHA the better option.

So which one should you choose? It largely depends on your individual circumstances. PMI could be the better choice if you can afford a down payment of 10% or more and have a good credit score, as it can be canceled once you’ve built up enough equity. FHA mortgage insurance, despite being noncancelable, might be a more suitable option if your credit score isn’t as strong or you have a smaller down payment, as FHA loans tend to have more lenient qualification requirements.

Remember, choosing the right kind of mortgage insurance can make a significant difference in your homeownership journey. Always consult a mortgage broker or financial advisor to find the most suitable option for your unique financial situation.

Navigating the world of mortgages can be complex, but understanding the differences between PMI and FHA mortgage insurance can help clear some of the fog. Happy house hunting!

Chris Johnson started his mortgage career in 2004. He’s been a Canton resident since 2020. As CEO of Sunshine Mortgage, he’s always willing to provide unbiased mortgage advice. 678-952-9020.