When your loan's backed by the Federal Housing Administration, you can get by with as little as a 3.5 percent down payment, provided your credit is good. You pay extra each month, though, if the FHA requires you to take out mortgage insurance. It used to be the FHA only required 4 percent of customers to take out insurance, but that number has grown to more than 20 percent.
Unlike private mortgage insurance, FHA mortgage insurance requires two different premiums. The first one you pay upfront, as part of the closing costs. The rate is 1.75 percent of the loan -- $1,750 per $100,000. The second premium is a monthly payment with several possible rates. The FHA mandates you keep paying insurance a set number of years before cancellation.
Up until 2013, the FHA rule was that you could cancel your insurance once you'd paid premiums for five years, provided you'd also paid the loan down to 78 percent of your home's worth. Starting June 2013, new FHA loans play by new rules. If your down payment is 10 percent of the purchase price or more, you keep your insurance for 11 years. Pay less and you're stuck paying insurance premiums for the life of the loan.
If you refinance to a non-FHA mortgage, you can dump your FHA insurance because you no longer have an FHA loan. You don't get any reimbursement for your upfront premium. Crunch numbers before taking out a non-FHA refi: closing costs can eat into the amount you save by eliminating the mortgage premiums. If you don't have a lot of equity in your house, you may not get a good rate with a conventional refi.
If you take out an FHA streamline refi, you're stuck with your mortgage insurance. It does offer advantages, however: you don't have to get an appraisal, verify your income or provide a credit history to get a lower-interest loan. If you have an old mortgage bound by the old mortgage insurance rules, you can get your loan balance down to 78 percent faster once you're paying less interest. Once five years pass, you're free to terminate your mortgage insurance.
A Durham, NC resident, Fraser has written about law, starting a business, balancing your budget and fighting evictions, among other legal and financial topics.