Higher Credit Scores Equal Lower PMI
Borrowers with higher credit scores will usually pay less in insurance with a conventional mortgage than an FHA loan, which requires a hefty upfront cost—1.75% of the total loan amount—in addition to the monthly expenses. Typically, borrowers with credit scores higher than 720 will save money through conventional mortgages.
Some mortgage lenders advise borrowers to try to raise their credit scores before applying for a mortgage as it can have an enormous impact on how much you pay in insurance.
“The loan amount isn’t the only factor that determines the cost of PMI. An applicant’s credit score also plays a major role,” English says. “A borrower should optimize their credit scores to maintain the lowest possible mortgage insurance premium.”
Pros and Cons of PMI vs. MIP
Cost is just one difference between the insurance you get with conventional loans, PMI and the insurance for FHA loans, or MIP.
The advantage of PMI is that it’s automatically canceled when your mortgage reaches a 78% loan-to-value ratio (LTV). But hitting the 78% LTV can happen in one of two ways: you pay off your mortgage enough to reach that LTV marker, or your home rises in value to meet the marker. With home prices shooting up over the past year, many folks got a big boost toward their LTV minimum for removing PMI. This is a considerable cost savings for homeowners.
FHA borrowers, however, have to make mortgage insurance payments unless they refinance into a conventional mortgage, regardless of their LTV.
With FHA mortgages, all borrowers have to pay an upfront mortgage insurance premium, or UFMIP. That cost is currently fixed at 1.75% of your loan amount. This means, FHA borrowers would pay about $6,295 for UFMIP based on the median sales prices of a single-family home at $359,700 as of Oct. 21, 2021, according to the Federal Reserve Bank a St. Louis.
Borrowers can pay that amount in one lump sum at closing or roll it into their mortgage and pay it off over time.
FHA borrowers only have to put 10% down to avoid monthly mortgage insurance requirements. That’s in contrast to the 20% conventional loan borrowers are required to pay upfront. But, unlike conventional mortgages, MIP (the insurance for FHA loans) are fixed—the current rate is 0.85% of the loan amount.
The cost of PMI (the insurance for conventional mortgages) is not fixed; it changes based on factors like the down payment amount and credit scores.
Although FHA mortgages can make it easier for buyers to access homeownership—the down payment and credit score requirements are usually lower than that of a conventional mortgage—the mortgage …….