VA Loans and Mortgage Insurance
VA Home Loans offer a bevy of financial benefits that range from the flagship benefit of $0 money down to the ability secure financing with less than perfect credit. However, an often overlooked benefit is the lack of mortgage insurance.
Private Mortgage Insurance (PMI) is meant to protect the lender in the instance a borrower defaults on their mortgage. This fee normally ranges from 0.3 percent to 1.15 percent of the entire loan amount each year. For conventional borrowers, the only way to escape PMI is to have a down payment of 20 percent of the home’s appraised value, or pay down 20 percent of the mortgage following closing.
FHA borrowers are also subject to mortgage insurance, known as Mortgage Insurance Premiums (MIP), but are also required to pay an additional upfront premium of 1.75 percent of the entire loan amount. Aside from the additional 1.75 percent, FHA borrowers differ from conventional homebuyers in the sense that they must pay the yearly mortgage insurance for the life of the loan – taking up to 30 years.
To put this in perspective, in 2013, the average loan amount for a VA Home Loan was $225,000. A VA homebuyer will have zero additional PMI cost, while a conventional borrower could have an additional yearly cost ranging from $675 to $2,587.50. And, for an FHA borrower, there will be an additional annual MIP cost ranging from $1,012.50 to $3,037.50 plus the additional $3,937.50 required at closing.