California home buyers tend to have a lot of questions about the real estate closing…
FHA MIP vs. PMI: A Buyer’s Guide to California Mortgage Insurance
This guide explains the key differences between FHA mortgage insurance in California and the PMI that sometimes gets applied to conventional loans. We’ll also cover the typical cost for both options.
Here are five key points you should know right off the bat:
- FHA loans are backed by the government, while conventional loans are not.
- FHA loans almost always require a mortgage insurance premium (MIP).
- Conventional loans require private mortgage insurance (PMI) if there’s a small down payment.
- FHA MIP includes both an upfront and annual fee, which usually lasts for the life of the loan.
- PMI costs can vary based on factors like credit score and can often be canceled later.
Have questions? If you have a mortgage-related question that’s not covered below, please contact our staff. We can answer your questions and even help you choose the best loan option.
At a Glance: FHA vs. Conventional Loans
Let’s start with the primary difference between FHA and conventional loans, before moving on to the mortgage insurance side of things.
The main difference between these two financing options has to do with government backing.
- FHA loans are insured by the Federal Housing Administration, a government agency that falls under the Department of Housing and Urban Development.
- Conventional loans, on the other hand, do not receive any government insurance backing.
Generally speaking, FHA loans are easier to qualify for because they are partly insured by the government, giving lenders an added layer of protection.
But this insurance also benefits home buyers, by making the program more accessible. You don’t need perfect credit or a big down payment to qualify for an FHA loan, and that’s by design.
Key point: Mortgage insurance can be required for both FHA and conventional loans. The difference is that it’s always required for FHA, but it’s only required in certain scenarios for conventional loans.
FHA Mortgage Insurance Premiums
Home buyers who use the Federal Housing Administration (FHA) loan program typically have to pay for mortgage insurance. In fact, the FHA requires two different types of insurance premiums – upfront and annual.
- The upfront premium is equal to 1.75% of the loan amount.
- The annual premium can vary depending on the loan size and term. For most borrowers, the FHA annual insurance premium equals 0.55% of the loan amount per year (divided into 12 monthly installments).
Most borrowers who use the FHA program put down less than 5% and have a mortgage term greater than 15 years. For this majority, the annual mortgage insurance premium comes to 0.55% of the loan amount.
Additionally, most borrowers who use this program have to pay the annual MIP for the life of the loan. It can’t always be canceled, the way it can for private mortgage insurance, which we will talk about next.
Key point: This is an important distinction worth repeating. FHA mortgage insurance often lasts for the life of the loan, while PMI can be canceled once the homeowner builds up enough equity.
Conventional PMI in California
As mentioned, a California conventional mortgage loan is a “regular” home loan that does not receive any kind of government backing.
The term “conventional” is used to distinguish this type of financing from government-backed mortgage programs, such as FHA, VA, and USDA.
In California, conventional loans can also come with mortgage insurance. But it doesn’t come from the government. It comes from insurance companies within the private sector. So it’s called private mortgage insurance, or PMI.
Unlike an FHA loan, which requires mortgage insurance for nearly all borrowers, conventional home loans only require it in certain situations. PMI is usually required when a borrower makes a smaller down payment that results in a loan-to-value (LTV) ratio above 80%.
This is why some home buyers in California choose to put down 20% or more when buying a house. By doing so, they can keep the LTV ratio at or below 80%, thereby avoiding private mortgage insurance entirely.
Homeowners can request PMI cancellation when the loan balance drops to 80% of the home’s original value. PMI must be canceled automatically when the loan balance drops to 78%, if the homeowner is current on payments.
Key point: PMI is only required when a home loan accounts for more than 80% of the property value. You can avoid it by making a down payment of 20% or more, or by using a piggyback mortgage.
Which One Costs More?
The cost of FHA mortgage insurance is fairly straightforward. You’ll pay an upfront premium equaling 1.75% of the loan amount, along with an annual premium that comes to 0.55% (for most borrowers).
But the typical cost of private mortgage insurance in California can vary, due to a number of factors.
For example, borrowers with excellent credit often qualify for lower PMI rates, compared to those with weaker credit. The down payment size can also influence the amount you pay for private mortgage insurance.
In California, the annual premium for a standard PMI policy is usually expressed as a percentage of the loan amount. The average cost ranges from 0.58% to 1.86% of the loan amount per year.
Because of these variables, FHA mortgage insurance can be more affordable for some borrowers, while PMI for a conventional loan might work out better for other borrowers.
Generally speaking, the monthly FHA MIP tends to cost less than PMI for borrowers with lower credit scores. That’s because the FHA charges the same rate for all borrowers, regardless of credit scores.
On the other hand, home buyers in California who have excellent credit might get a better deal by using a conventional loan with PMI, rather than the FHA option.
Every scenario is different, because every borrower is different. So it’s almost impossible to do an across-the-board comparison between FHA mortgage insurance and PMI.
Key point: FHA mortgage insurance charges set rates (1.75% upfront and usually 0.55% annually), while PMI costs can vary based on a borrower’s credit score and down payment.
Need Help Choosing an Option?
You can estimate the cost of FHA mortgage insurance in California by applying the percentages mentioned above to the estimated loan amount.
For example, to estimate the upfront mortgage insurance premium, you could multiply the expected loan amount by 1.75% (0.0175), if that’s the rate that would apply to you.
Estimating private mortgage insurance is trickier. You don’t know exactly how much you’ll be charged for a PMI policy in California, until you get a quote from the insurer. Your credit score, down payment, and other variables can affect the cost.
This underscores the importance of working with a knowledgeable mortgage professional, before making any final decisions. Our loan experts can review your financial situation and goals to help you determine the best option.
Let’s talk: Please contact our staff if you have questions about paying mortgage insurance in California, or if you would like to receive a cost comparison for different options.
