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You cannot roll mortgage insurance into closing when you buy a house with a conventional loan. However, if you purchase a home with government-insured financing, such as FHA or VA loans, you can include the upfront mortgage insurance premium into your new loan. If you borrow more than 80 percent of the home's current value with a conventional loan, you will need to carry private mortgage insurance (PMI), but there's no upfront premium and no need to roll lump-sum premiums into closing costs.
Private Mortgage Insurance
PMI involves a monthly charge for insurance when you put less than 20 percent down on a house. There is no upfront fee. Your lender typically escrows the mortgage insurance cost each month. The lender then pays the PMI company once a year for your annual premium expense. Because there is no upfront charge, rolling PMI into your mortgage amount is not an option.
FHA Mortgage Insurance
Although FHA does not make direct mortgages, FHA guarantees home loans with small down payments. However, unlike PMI, you must pay the first year's mortgage insurance cost upfront at closing. When you purchase a home with an FHA loan, you can roll this premium into your closing mortgage amount. Should you refinance an FHA home loan, you can also roll the upfront cost of mortgage insurance into your new loan amount.
VA Mortgage Insurance
Veterans Administration (VA) home loans allow borrowers to roll their upfront mortgage insurance premium into their loan amount at closing. The VA does not call their upfront charge "mortgage insurance." Instead, it's called a "funding fee." However, it serves the same purpose. VA funding fees serve to mitigate the risk with low or no down payment home financing, similar to traditional mortgage insurance.
USDA Rural Development Loans
USDA loans from the Department of Agriculture also require mortgage insurance, called a "guarantee fee." Similar to VA funding fees, USDA guarantee fees are really upfront mortgage insurance premiums. You can roll this upfront fee into your new USDA mortgage balance, whether you're purchasing or refinancing a home.
Cost of Financing Mortgage Insurance
As unwelcome as upfront mortgage insurance might be, by any of its various names, it will also cost you more over time. Once you need mortgage insurance, you'll be paying monthly premiums for at least two to five years, possibly longer per PMI rules. If you add this premium to your mortgage amount, you'll pay interest on this money each month. For example, FHA requires that you keep its mortgage insurance for five years or until your loan-to-value ratio declines to 78 percent, whichever takes longer.
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