Insuring Federal Housing Authority Mortgages

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You may have heard of private mortgage insurance (PMI), an insurance you have to pay for when you take out a home loan with a down payment of less than 20% from a conventional lender. Unfortunately, while the Federal Housing Authority (FHA) is more generous than conventional lenders in many respects, it, too, requires mortgage insurance for low down payment loans. In this article, you’ll learn what FHA mortgage insurance is, how it differs from PMI, who is required to carry it and for how long, how much it costs, and your options for avoiding it or getting rid of it. 

Like PMI, the purpose of FHA mortgage insurance is to protect the lender. When borrowers have minimal equity in their homes, the risk (to the lender) that the borrower will default is higher, because the borrower doesn’t have as much to lose by walking away and letting the bank foreclose on the home; all you have to do is look at all the people who walked away from their 0%-down-payment during the period of housing-bubble mortgages and you’ll understand.

How Can You Avoid or Get Rid of FHA Mortgage Insurance?

Because FHA mortgage insurance adds a significant expense to the cost of home ownership, you’re probably wondering if there’s anything you can do to reduce or avoid it, and at what point are you allowed to get rid of it.

The easiest way to avoid mortgage insurance, of course, is to put down 20%. You can do this by waiting to buy until you have more savings, or in some cases, by purchasing a less-expensive property, where you can afford to put down 20%. Of course, realistically, if you are looking at a FHA loan with 3.5% down, you are probably walking a fine line between being able to afford any mortgage at all, and having to keep renting.

Is It Worth It?

Kinda, sorta maybemeaning when considering a low down payment loan, think about whether the extra cost of both the up–front mortgage insurance and the monthly mortgage insurance premiums are worth it to you to get a house sooner. It’s hard to calculate whether you’ll win or lose financially, in the long run with this arrangement, since you can’t predict what housing appreciation rates will be between the time when you have 3.5% to put down and the time when you have 20% to put down. You also can’t predict, accurately, how many years it would take you to save the extra 16.5%, because incomes and expenses can change, for better or worse, in ways no one can anticipate. For these reasons, it may be best to decide on a psychological basis whether you are comfortable with paying the extra money required for mortgage insurance in order to have a place to call your own.

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