Author’s note: This is a selection from my new book, How To Buy A Home and Not Lose Sex: Find the Best House, Make the Best Offer, and Keep Your Love Life, which you can purchase on Amazon by clicking here.
In the next few weeks I’m going to cover all the closing costs I can think of. In past weeks I’ve covered the down payment, the cost of a Realtor, earnest money deposits, prepaid closing costs, flood elevation certificates, insurance, escrows, title insurance, lender fees, and, of course, freaking out about closing costs! This week I share the joy of PMI and funding fees.
One More Closing Cost You’ve Never Heard Of: PMI
If you put less than 20% down, you have to pay something called “private mortgage insurance,” a.k.a. “PMI.”
PMI is basically insurance that you pay in case the bank has to foreclose on your loan.
You can’t shop rates for PMI (the bank chooses), and PMI runs anywhere from .3% to 1.15% of the original loan amount per year.
Let’s say the PMI is .5% and the loan amount is $180,000. The PMI every year will be $900. The bank will divide this into each monthly payment; thus you will end up with $75 more tacked onto your payment each month (remember, you already have tax and insurance escrows tacked onto your payment as well).
When you pay down the loan amount to 78% of the original purchase price, the lender is required to remove the PMI.
Back in the days of the housing bubble, homes appreciated really fast, so people would get an appraisal to “prove” that they had more than 20% equity in a home and get the PMI dropped.
You can’t do that anymore. You have to put 20% down at the time of purchase or get the principal down to 78% of the original purchase price to avoid PMI.
Another thing people used to do during the housing bubble was get an 80% loan and a 20% loan at the same time to essentially get 100% financing.
Does anyone remember how that worked out?
Some kind of housing crash, I believe?
The worst housing crash in American history, actually, and a boatload of bad loans that helped trigger the Great Recession.
So they don’t do 80/20 loans anymore, either.
You have to put money down these days, and to avoid PMI, the down payment has to be above the 20% mark.
One last thing: Some, but not all, PMIs have a funding fee that is paid at closing. This could be 1%–2% of the loan amount.
Funding Fees for Government-Backed Loans (Like FHA and VA)
Government-backed loans (FHA, VA, and USDA loans) do not have PMI.
Instead, they have something similar to PMI called a “mortgage insurance premium” or “MIP.”
MIP for FHA is currently listed at .85% of the loan amount, and it essentially works the same way as PMI. Please note, that number is current as of this writing but it has changed nearly every year since 2007.
There’s also an FHA “funding fee” (sometimes called a “guarantee fee” or “Upfront MIP”) equal to 1.75% of the loan amount at closing.
So if you have an FHA loan of $150,000, you will have an extra $2,625 in closing costs for the Upfront MIP and an additional $106-ish tacked onto your monthly payment for the MIP.
The funding fee can be rolled into your loan if you’ve met the 3.5% down-payment threshold for FHA.
MIP for a USDA loan is .4%, with a funding fee of 2.0%.
USDA recalculates the MIP every year based on the current principal balance, not the original loan balance. So USDA costs a bit more on the front end but is less costly on the monthly payment.
There is no MIP or PMI for a VA (veterans) loan. However, there is a funding fee of 1.25-3.3% for a VA loan depending on the veteran’s eligibility. If a vet puts over 5% down, the funding fee can be reduced.
If you don’t know what these loan types are, don’t worry; I’ll cover them later in the book. I only mention them now so you can get an idea of what type of cash you might need to bring to closing.
If you are thinking about buying a home, please consider hiring myself and my team as your Realtors. We can help you find the best house and make the best offer. Contact me at Sean@StAugTeam.com or my partner Kate at Kate@StAugustineTeam.com.