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  Ask Dr. Don By Don Taylor, Ph.D., CFA, Bankrate.com    

For FHA mortgages, it's PMI by another name

Dear Dr. Don,
I'm buying a home with an FHA mortgage at 6.5 percent. Is there any way to avoid having the PMI amount financed into my mortgage amount or can I avoid it altogether? I'm not putting 20 percent down. My mortgage amount is $244,500. With PMI of $3,667, it's up to $248,167. Please advise. Thanks.
-- Marisol Mortgage

Dear Marisol,
FHA (Federal Housing Administration) insured mortgages don't have private mortgage insurance (PMI). Instead, FHA mortgages carry mutual mortgage insurance (MMI). The MMI premium is paid through both an upfront mortgage insurance premium (MIP) and a monthly mortgage insurance (MI) premium. Any unused portion of the upfront MIP may be refunded within the first 60 months of the loan.

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The monthly mortgage insurance payment will automatically be canceled when the outstanding principal balance reaches 78 percent of the original purchase price (provided that the monthly mortgage insurance payments have been made for a minimum of five years for 30-year loans). Home buyers making a down payment greater than 10 percent of the purchase price, however, don't have to pay the monthly mortgage insurance when financing with a 15-year mortgage, but do still have to pay the upfront MIP.

Bottom line: You can't avoid mortgage insurance on an FHA loan. The upfront MIP doesn't have to be financed in your mortgage. Just bring the payment to closing. Many FHA home buyers are struggling to raise the down payment and won't be able to pay cash at closing for the MIP, but it is an option.

-- Posted: Sept. 28, 2004

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See Also
Differences between FHA and conventional mortgages
Should we do an FHA streamline refinance?
Financial advice glossary
More Dr. Don stories

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