We often receive questions regarding USDA loans and monthly mortgage insurance or “PMI” as this is commonly referred to. Monthly mortgage insurance is often required for loans when the down payment is less than 20%. The technical term of this monthly fee can vary based on the loan program. In this post, we will break down the information home buyers will want to know.
In the case of conventional or “conforming” loans, PMI paid on all loans that are above 80% loan to value. Under the Homeowner’s Protection Act, private mortgage insurance (PMI) can be removed by the request of the homeowner or automatically when the mortgage balance is paid down 80% or less.
FHA loans call this fee the mortgage insurance premium (MIP). Again, this is a monthly fee however it is required for the life of the loan when you finance over 90% loan to value. Basically, with a down payment of 10% or greater, the MIP will be removed after 11 years.
With USDA loans, they don’t technically have monthly PMI. Instead, USDA refers to this as their “annual fee” Like, FHA, the USDA annual fee is paid monthly for the life of the loan. The good news is this fee is over 2x less when compared to FHA loans. Here’s an example to help show you the difference:
FHA Mortgage: Fee factor – .85% X $150,000 = $1,275.00 / 12 = $106.25 per month
USDA Mortgage: Fee factor – .35% X $150,000 = $525.00 / 12 = $43.75 per month
As you can see there is a pretty good saving with the USDA program. This is important, especially for FHA buyers to remember. If you meet the USDA eligibility requirements regarding household income and property location, you may want to look closer at the USDA loan just for the monthly savings over FHA. Keep in mind that USDA offers 100% financing, but buyers can also put 3%, 5%, etc down payment if they choose.
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