As a Mortgage Broker, I often receive queries from prospective homebuyers about the
complexities of mortgage insurance. Two terms that often confuse homebuyers are PMI, which
stands for Private Mortgage Insurance, and FHA Mortgage Insurance, a product associated with
loans offered by the Federal Housing Administration (FHA). Let’s break them down in a way
that’s easy to understand.
PMI is a type of insurance policy that protects the lender in case you default on your mortgage
loan. This insurance is typically required when a homebuyer makes a down payment of less than
20% of the home’s purchase price. Once you’ve built enough equity in your home (usually when
your loan balance drops to 78% of the home’s original appraised value), PMI can be cancelled,
which can lower your monthly payment.
On the other hand, FHA Mortgage Insurance is a mandatory component for all FHA loans,
regardless of your down payment size. This insurance comes in two parts: an upfront premium
that’s paid at closing by being added to your loan amount, and an annual premium that’s
divided into monthly payments. Unlike PMI, FHA Mortgage Insurance can’t be cancelled for
most mortgages. This means you’re required to keep paying the insurance premium for the life
of the loan or until you refinance into a non-FHA loan. Also, as of 2023, FHA has reduced the
Monthly premium. Depending on your down payment, it can be as low as .50%. This, along
with the lower FHA mortgage rate, does usually make FHA the better option.
So, which one should you choose? It largely depends on your individual circumstances. PMI
could be the better choice if you can afford a down payment of 10% or more and have a good
credit score, as it can be cancelled once you’ve built up enough equity. FHA Mortgage
Insurance, despite being non-cancellable, may be a more suitable option if your credit score
isn’t as strong or you have a smaller down payment, since FHA loans tend to have more lenient
Remember, choosing the right kind of mortgage insurance can make a significant difference in
your home ownership journey. Always consult with a mortgage broker or financial advisor to
find the most suitable option for your unique financial situation.
Navigating the world of mortgages can be complex, but understanding the differences between
PMI and FHA Mortgage Insurance can help clear some of the fog. Happy house hunting!