Episode 13 - Is Mortgage Insurance Good or Bad?
Mortgage Insurance in Utah: How to Save Thousands on PMI and Upfront Fees
Most homebuyers don’t realize this until it is too late, but mortgage insurance can quietly cost you thousands. It shows up as PMI on conventional loans, and as upfront funding fees or mortgage insurance premiums on government loans like FHA, VA, and USDA.
This episode is all about mortgage insurance and how to set up your mortgage in a way that keeps your costs low. If you want help comparing options for your exact scenario, schedule a free consultation and we will lay everything out side by side.
Is mortgage insurance good or bad?
Mortgage insurance has a bad reputation, and for good reason. It can be expensive.
But it also played a huge role in making homeownership possible for buyers without 20% down. Before mortgage insurance existed, home loans were often short term, adjustable, and required massive down payments, sometimes 50% or more. Then FHA was created in 1936 and introduced the idea of insuring loans to reduce risk for lenders.
In simple terms, mortgage insurance is what allows lenders to approve loans above the 80% threshold. Without it, most buyers would need about 20% down to buy a home.
So mortgage insurance is helpful, but only when you understand how to manage it.
Why FHA mortgage insurance got so expensive
After the 2008 housing crash, many banks and mortgage insurance companies failed. FHA became a major backstop for the market and grew rapidly. To rebuild its reserve fund and reduce how many buyers relied on FHA, FHA increased costs.
Today, FHA includes:
An upfront mortgage insurance premium of 1.75% of the loan amount that is typically rolled into the loan
A monthly mortgage insurance cost of 0.55% per year, divided into your payment
On a $400,000 loan, that upfront premium is about $7,000. It is not refundable. If you sell soon, that money is gone.
In 2013, FHA also changed the rules so monthly mortgage insurance is effectively permanent for most buyers unless they refinance out of the FHA loan.
Government loans: FHA vs VA vs USDA
VA and USDA also have upfront fees that function like mortgage insurance.
VA loans can be excellent for eligible veterans, but many borrowers pay a non-refundable funding fee of 2.15%. If you use VA again with zero down, it can rise to 3.3%. Some borrowers may have the fee waived with a qualifying service-connected disability rating.
USDA loans typically have a 1% upfront fee and a 0.35% annual fee, which is often lower than FHA, but still not zero.
Even if you only compare these government programs, the differences can be thousands upfront and meaningful monthly savings.
Why conventional loans can save the most for qualified buyers
If you have good credit, conventional loans often win on mortgage insurance.
Conventional allows as little as 3% down, with:
No upfront mortgage insurance by default
Monthly mortgage insurance that varies by credit and down payment
Mortgage insurance that can be removed when you reach 20% equity, without refinancing
That last point is huge. If rates never drop or refinancing is not advantageous, conventional gives you a built-in exit strategy for mortgage insurance.
Just keep in mind that for buyers with lower credit scores, conventional mortgage insurance can get expensive. In those cases, FHA may look better side by side.
The big mistake to avoid right now:
Many buyers are steered into FHA because the interest rate looks better. The upfront mortgage insurance is often brushed past because it is rolled into the loan.
But if refinancing is part of your plan, that upfront premium increases your loan balance and can slow down your ability to refinance into a conventional loan later. It may take longer to build enough equity to qualify for the best refinance options.
Rules of thumb that keep you from wasting money
Mortgage insurance is a deep rabbit hole, but your decision does not have to be complicated.
Here are the guidelines from this episode:
If refinancing is likely in the next 2 to 3 years, prioritize low fees and avoid upfront mortgage insurance when possible
Choose mortgage insurance that can be removed without refinancing when you can
Do not let someone sell you a “30-year savings” story if your realistic loan timeline is 2 to 3 years
The best way to do this is to compare your options on paper with your time horizon clearly defined.
Want to see your best mortgage insurance strategy?
A consultation is free, and this is exactly what we do. We will lay out FHA, VA, USDA, and conventional options in simple columns, then choose the one that saves you the most based on your real timeline.
Schedule your free mortgage consultation and get preapproved with the best deal you are eligible for.