A mortgage insurance premium will greatly increase the cost of financing your home. When the FHA guarantees your home loan, it promises to purchase the loan in case of default. In order to reduce its own exposure to risk, the FHA will ask you to carry mortgage insurance that will pay out in the case you default. You will have to contribute a monthly expense to the premium, which is often carried by an insurer of your mortgage company's choice. While you cannot entirely remove this expense, there are several changes you can make to reduce the cost of your mortgage insurance.
Removing the Mortgage Insurance Requirement
The FHA places the mortgage insurance requirement on all loans. The mortgage insurance premium on an FHA loan partly depends on the terms of the loan. Larger loans require higher premiums because they may require the insurance company to make a bigger payment if you default. This is similar to the way more expensive cars are more expensive to insure; since the potential losses are high, the insurance limits must also be high. By placing at least 20 percent down on a home, you can greatly reduce the limits of your loan. This will make your mortgage insurance premium much lower. The FHA often makes it possible to secure very low down payment loans, but considering the insurance premium is essential to reducing the ultimate expense of the financing.
Structure of a Mortgage Insurance Premium
Over time, as you repay a significant portion of your home loan, the mortgage insurance premium may no longer be necessary. On private loans, the mortgage insurance premium payment may stop after five years. With an FHA loan, however, the requirement can be lengthier. The length of your mortgage insurance premium will be disclosed in the terms of your mortgage. If you would like to shorten the amount of time this payment is required, contribute larger monthly payments to reduce your remaining principal faster. For example, you can elect a 15-year mortgage instead of a 30-year option to recover equity faster and reduce your premium.
Qualifying for FHA Loans
Even with the added expense of additional mortgage insurance, FHA loans offer borrowers a number of key benefits. Because the government is guaranteeing the loan against default, mortgage companies will extend loans at lower rates and with less money required up front. You can only capitalize on the loan guaranty and lower interest rate of an FHA if you meet minimum credit requirements. Down payment amounts are significantly lower.