The two most common loans available in the marketplace are Conventional loans and FHA Loans. FHA Loans are insured by the Federal Housing Administration and Conventional mortgages are backed by Fannie Mae and Freddie Mac.
When you use an FHA loan to purchase or refinance a house there is an upfront mortgage insurance premium calculated at 1.75% of the loan amount then that figure is financed in the loan. This can also be paid for in cash at closing.
When you use a Conventional Loan you can use a mortgage insurance premium prepaid in full that is almost like a gym membership where you prepay the PMI in full at which point your loan balance is bigger like the FHA scenario.
Frequently asked questions you should know…
Q Why is my loan amount bigger? It doesn’t make sense because my purchase price and loan amount should be lower.
A The loan amount is higher because you are electing to finance the premium for either an FHA Loan or for a Conventional Loan. The alternative would be to pay this amount in cash.
Q Why does my FHA Mortgage have two mortgage insurance premiums? Why is there a monthly version as well?
A The FHA requires two forms of PMI an ufmip which is an upfront mortgage insurance premium and then a monthly MIP typically based on .85% of the loan amount. The FHA charges these premiums as a byproduct of obtaining an FHA Loan.
Q What’s the benefit of going with single pay mortgage insurance and financing my PMI?
A You can save several hundred dollars per month when financing the PMI by electing to take prepaid upfront premium on a conventional mortgage. By doing you would be electing to not have it in your monthly mortgage payment. Monthly PMI that most lenders put borrowers into (because it’s easier for the lender) on conventional loans must remain for 5 years and then at 20% equity it’s a “petition” to drop the monthly fee.
Q How do I get my payment as low as possible while still being able to purchase the max amount of house?
A By working with a minimum down payment of 10% you would greatly benefit from using a Conventional Mortgage with single pay financed pmi. This may yield you another 50k to $70k more in borrowing power enhancing your real estate agent’s ability to help you get into contract more easily. This scenario would support being able to purchase a house that otherwise may have been out of your reach while attaining a rock bottom affordable low payment. It is quite literally the best scenarios working with less than 20% down to buy a home.
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