Learn about PMI, MIP, and the VA funding fees on your home loan
Learn about PMI, MIP, and the VA funding fees on your home loan
When purchasing a home with a mortgage, it’s important to understand the fees involved, especially PMI, MIP, and the VA Funding Fee. These fees protect lenders and allow for more flexibility in loan qualifications. Here’s an in-depth look at each one.
PMI (Private Mortgage Insurance):
PMI is required on conventional loans if the borrower makes a down payment of less than 20%. It protects the lender in case the borrower defaults on the loan, reducing the lender’s risk. PMI costs typically range from 0.5% to 1% of the loan amount per year, and it’s added to the monthly mortgage payment. For example, on a $200,000 loan, PMI could cost between $1,000 and $2,000 annually. The good news is that PMI can be removed once you reach 20% equity in your home, either through regular mortgage payments or home value appreciation.
MIP (Mortgage Insurance Premium):
MIP is required for FHA loans and functions similarly to PMI. However, unlike PMI, MIP is required for all FHA loans, regardless of the down payment size. MIP involves two parts: an upfront fee of 1.75% of the loan amount and an annual fee that ranges from 0.45% to 1.05%, depending on the loan amount and length. While the upfront fee can be rolled into the loan, the annual MIP is paid monthly along with the mortgage payment. FHA borrowers who put less than 10% down will typically pay MIP for the life of the loan, unless they refinance into a conventional loan.
VA Funding Fee:
The VA Funding Fee is a unique fee for VA loans, which are available to veterans, active-duty service members, and eligible military families. VA loans don’t require PMI or MIP, but they do come with this one-time funding fee. The VA funding fee helps sustain the VA loan program and reduces the burden on taxpayers. For first-time homebuyers using a VA loan with no down payment, the fee is 2.15% of the loan amount. Veterans with service-related disabilities are typically exempt from paying this fee. The funding fee can either be paid at closing or financed into the total loan amount.
Knowing the differences between PMI, MIP, and the VA Funding Fee can help you better understand your mortgage costs. Each fee serves a specific purpose and affects your monthly payments depending on the loan type. By understanding these fees, you can make smarter financial decisions when buying a home.
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