Understanding FHA Mortgage Insurance Costs

While most first time home buyers are able to do some research into various aspects of home buying, one thing that always seems to have them perplexed is the FHA mortgage insurance costs and the need for them.

In fact, it is very common for people to ask their loan officers about the phenomena of the FHA PMI (private mortgage insurance premium) that they keep seeing on their account statements. If you have been trying to answer such questions in your head as well, then the following information and description should be of some use to you.

What Is FHA Mortgage Insurance?

The most obvious question to ask would be what the FHA mortgage insurance is. The FHA mortgage insurance premium that you pay is a financial guarantee for the lender that he would be compensated in case you are unable to pay the loan back or if you default. There are two considerations here. Either the FHA mortgage insurance costs paid by you would be designed to completely eliminate losses for the lender or, at the very least, reduce them for him.

Why Do You Need to Pay the FHA Mortgage Insurance Premium?

The existence of mortgage insurance makes it feasible for lenders to provide loans to individuals who would otherwise be required to put up larger down payments towards the home purchase. In other words, you are able to purchase your home with such a low down payment because of the mortgage insurance that you have. Therefore, the reason why you need to pay FHA PMI is simply that you would have to pay a much larger down payment for the home if you did not have it.

How Does The Risk Get Divided Between The Lender And The Insurance Company?

Resultantly, the fact that you pay this premium means that the risks pertaining to potential defaults from you are being divided between the institution giving you the loan and the institution from which you have the insurance. When these risks are smaller for both, this makes the whole thing viable for both the institutions.

You are most probably wondering when you can stop paying this FHA mortgage insurance premium. This usually depends on the term of your mortgage and your LTV (loan to value). Generally, your LTV has to be below 78% and you have paid them for at least five years for these premiums to stop. So be prepared to pay them for a while.

Remember, most conventional programs require a 10% down payment, while the FHA program requires only a 3.5% down payment. So your closing costs will be a great deal lower with the FHA loan than with a conventional loan. So do not let these FHA mortgage insurance costs (which are the premiums) scare you. They are there to make is possible for you, the first time home buyer, to qualify for a mortgage and buy that awesome house.

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