What’s the difference between an FHA mortgage insurance and PMI?

by Elena Romanova on January 21, 2009

The FHA insures only a limited range of mortgages provided by FHA-approved lenders. PMI insurers service mortgages of the conventional market.

PMI is required if a homebuyer borrows more than 80% of the property’s purchase price in one loan; the FHA insurance is required for any FHA mortgage, irrespective of the size of the down payment provided. The premiums for both insurances get cancelled at a certain point (was not true of FHA premiums before Jan. 1, 2001), but the conditions for this to happen are different. The FHA insurance payments include 2 parts: the upfront mortgage insurance premium (UFMIP) and the annual premium remitted on a monthly basis – the mutual mortgage insurance (MMI). The UFMIP is an obligatory payment, which can either be made in cash at closing or financed into the loan, so that you really pay it over the life of the loan. It adds a certain amount to your monthly payments, but this is not PMI, nor is it the MMI. The MMI premiums come on top of that for all FHA Purchase Money Mortgages, Full-Qualifying Refinances, and Streamline Refinances, except for < 15-year FHA mortgages with loan-to-value ratio (LTV) < 90. When we talk about canceling the FHA insurance, we talk only about the MMI part of it. If you have financed the UFMIP into the loan, you cannot cancel this part. The MMI premium gets terminated automatically once the unpaid principal balance, excluding the upfront premium, reaches 78% of the lower of the initial sales price or appraised value. The insurance premiums on a 30-year FHA loan must have been paid for at least 5 years by then. A 15-year FHA mortgage annual insurance premium will be cancelled at 78% loan-to-value ratio regardless of how long the premiums have been paid. The FHA’s 78% is based on the initial amortization schedule, and does not take any extra payments or new appraisals into account. This is the big difference between PMI and FHA insurance: the termination of FHA premiums can hardly be accelerated. Borrowers who do make additional payments towards an FHA mortgage principal, may take the initiative through their lender to have the insurance terminated using the 78% rule, but not sooner than after 5 years of regular payments for 30-year loans. PMI termination, however, can be accelerated through extra payments, a new appraisal if the house has appreciated in value, and businesslike attitude.

PMI on a conventional mortgage can be avoided; FHA-insurance is actually what makes an FHA mortgage an FHA mortgage, it is essential and cannot be avoided.

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