Moreover, when you have a high FICO score, the “adjustment” to a conventional mortgage because you are making a low down payment will add 0.25 percent to your interest rate if you make a 5 percent down payment, or 0.75 percent if you make a lower down payment. Both of those charges are less than the 1.75 percent charged on FHA-insured mortgages with low down payments, and the cost of an 80-10-10.
“If you have a good credit score, private mortgage insurance is going to likely be your best option if you’re putting down less than 20 percent,” said Joe Parsons, branch manager for Caliber Home Loans in Dublin, California.
Down payment < 10 percent and iffy credit: Advantage FHA-insured. Sort of. If your FICO credit score is hovering around 700 (or lower), PMI becomes much pricier. With a 5 percent down payment and a FICO score of 680 to 699, the PMI charge jumps from 0.41 percent to 1.08 percent, and the interest rate adjustment jumps from 0.25 percent to 1.25 percent. Have lenders run the numbers for you for PMI and for an FHA-insured loan.
“Even if the FHA-insured mortgage has a lower monthly payment, you may still be better off paying a bit more for the conventional loan with PMI,” said Parsons. The advantage of a loan with PMI is that once you have 20 percent equity, your lender is required to drop the insurance. The insurance fee on an FHA-insured mortgage is permanent; the only way to get rid of it once you have 20 percent equity is to refinance. If rates are higher, you may not want to make that deal.
Down payment of 10 percent and high mortgage smount: Advantage piggyback Mortgage insurance (both flavors) is only available on loans that stay below certain federal limits. In 2017, the loan limit for a conventional mortgage is $424,100 in most regions and $636,150 in high-cost areas. For FHA-insured mortgages, the general limit is around $275,000 and up to $636,150 for high-cost areas. If you want to borrow more than that, an 80-10-10 may be the ticket to landing a mortgage.
“It’s a bit more hassle, in that there are two loans that need to close,” noted Mortgage Insider’s Lucas. The lender handling the primary mortgage will coordinate getting the piggyback, which may come from a different lender. You may pay a few hundred dollars to open the piggyback but shouldn’t be charged again for the appraisal, title insurance and other requirements you’ve covered with the primary. Piggybacks are typically home equity lines of credit (HELOC), which are variable rate loans. If as expected the Federal Reserve continues to raise interest rates, the cost of the HELOC will rise.
“But it’s just 10 percent of your purchase price, so the impact should be minimal,” Parsons said.
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