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I am purchasing a house with 15% down and I am trying to decide between going FHA or conventional. My FHA case number was pulled back in March, just before the new rules went into effect, so if I go FHA, I'm looking at the 60 month and 78% Loan to value ration before I can take the PMI off.

What I don't understand, is what the 78% LTV is calculated off of.

Is it based off of the appraised value of the house at purchase, to which I already have a 15% stake? If so, I'd reach the 78% mark in just under 5 years if I didn't pay any extra toward principle.

OR

Is it based off the amount I am actually borrowing regardless of how much I put down? In that case, I wouldn't reach the 78% for almost 11 years.

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Terminology

FHA doesn't have PMI which stands for Private Mortgage Insurance.

MI for Mortgage Insurance is the generic name.

FHA has MMI or Mutual Mortgage Insurance.

Rules

With PMI you can apply to have it removed if the value of your home increases in value. With MMI (from FHA) that is not possible.

The current FHA rules are here 1.

For your case, 85% LTV: the rule is no longer, PMI ends when you hit the 78% mark. It is you must pay 11 years PMI for a 30 mortgage with a 78% to 90% LTV. The current rules took effect June 3rd, 2013.


1. Note that many websites, including Wikipedia, have not been updated to reflect the current rules.

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From the link posted in the other response, it looks like you with be charged 1.3% of the loan value for MMI.

With an 85% LTV loan, in effect, you are paying 1.3% for the 5% down payment you don't have. Let me offer this with a few numbers. $100K home, $85K loan. 1.3% of $85K is $1105/year in MMI. This is for the fact that you are missing the $5000 extra deposit to get to 80% LTV.

This is over 20% in cost for that missing money. Most credit cards are below this rate. If one were at a 95% LTV, I understand that it might be tough to raise the remaining money needed, but in this case, 5% is so close the fee cost actually becomes absurd.

  • Won't a new mortgage at 80% LTV not require MI at all? – JoeTaxpayer Oct 2 '13 at 19:29
  • No, the new rule is 78%. fha.com/fha_requirements_mortgage_insurance – dcaswell Oct 2 '13 at 19:29
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    @JoeTaxpayer True, but current rates for FHA are 3.875% vs. 4.625% conventional. That reduction in interest rate over the life of the loan translates to a significant savings IF I am able to remove MMI (PMI for FHA) after 5 years. Since my case number was pulled before April 1st 2013 and is valid for another month I should be able to do that since I'd only need to pay down 7% principle in a 5 year period to hit the 78% mark. That's what prompted the original question, is LVT calculated off of - loan amount or sales price. Going through the process, I have found vast incompetence in lenders. :( – Peter Oct 2 '13 at 19:55
  • For 11 years the interest savings is negated by this fee. I was pointing out the true cost of that 7% difference. If you have any way to raise this money... – JoeTaxpayer Oct 2 '13 at 20:14

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