The Federal Housing Authority (FHA) does makes it easy for people to get home loans, but even this agency has certain rules that can act as roadblocks to homeownership. One such requirement is you must get private mortgage insurance (PMI) if your loan meets certain conditions, and sometimes the PMI must be maintained for the entire life of the mortgage. However, here are two ways you can avoid this obligation.
Pay a Substantial Down Payment
One of the primary benefits of an FHA mortgage is you can get away with putting as little as 3.5 percent down on the home you want to buy. This helps put homeownership within reach of people who may not have a lot of financial resources. Unfortunately, if your down payment is under 10 percent, you will be required to pay mortgage insurance for the entirety of the loan.
However, if your down payment amounts to 10 percent or more of the purchase price, you only have to keep PMI for 11 years. While this doesn't completely eliminate your obligation to pay for coverage, you will still save thousands of dollars by being able to drop the insurance as soon as your loan turns 11 years old.
It can be challenging coming up with 10 percent of the purchase price of a home that costs a couple of hundred thousand dollars, but look around for mortgage assistance resources. Even the FHA has programs that help people with their down payments, so contact a mortgage broker for assistance with finding something that will work for you.
Refinance When You Have Enough Equity
Another option for avoid PMI—or getting rid of it early—is to refinance your mortgage once you've accumulated enough equity in the home. FHA requires PMI regardless of how much of the loan is financed. However, conventional loans let you drop PMI when your loan balance drops below 80 percent of your home's market value. Thus, if you managed to chip away at your loan or the market value of your home has increased enough that you've built up enough equity, consider switching your mortgage from FHA-backed to a conventional one.
Be aware that refinancing comes with its own set of fees and requirements, and it may be more expensive to engage this option than it would be to just keep the insurance. It's best to sit with a mortgage professional to calculate the costs to determine which one is the cheapest option for you.
To have your questions about FHA loans answered, contact a mortgage broker or lender.
