Dear Dr. Don,

I currently am buying a home and will have to pay private mortgage insurance because I am using a Federal Housing Administration loan. I am getting the house for $317,000 and it appraises at $339,000. The house needs at least $50,000 in upgrades that I will be doing over the next year or so.

Do I pay the points now to get my interest rate at 5 percent, or just take the 5.5 percent interest rate and not pay points? Someone told me I have to pay PMI for a minimum of seven years with FHA and the only way out is to refinance. Having said that, why would I buy down only to refi in a year? The monthly difference is $98 and I would pay back the points in less than 18 months.

Can I get out of PMI if the house appraises well, or do I have to pay seven years worth regardless?

— Marty Mortgage

Dear Debbie,

FHA loans don’t have private mortgage insurance. Instead, the loans carry a government guarantee and you pay a mortgage insurance premium for that guarantee.

The premium is typically paid in two parts: an upfront mortgage premium paid at settlement equal to 1.75 percent of the loan amount for a new loan (1.5 percent for a streamlined refinancing), which can be added to the loan amount; and an annual premium of 0.5 percent to 0.55 percent spread out over the year and paid with your monthly mortgage payment. Fifteen-year mortgages have lower annual premiums.

When an FHA-insured loan is refinanced, a partial refund from the old premium may be applied toward the upfront premium required for the new loan. The amount of the potential refund is based on how long the original mortgage was in place.

Some borrowers don’t pay an upfront mortgage insurance premium. Those borrowers pay a higher annual premium and that premium stays in place over the life of the loan.  If you pay an upfront mortgage insurance premium, the annual premium stays in place until the loan-to-value of your mortgage reaches 78 percent of the initial sales price or the appraised value of your home, whichever was lower. The premiums must be paid for at least five years.

Paying discount points to reduce the stated interest rate on the loan is a separate decision. In general, it doesn’t make sense to pay discount points if you don’t plan on being in the loan for a long time. Bankrate’s “Mortgage Points Adviser” can help you make that decision.

The mortgage insurance premiums presented in this reply came about because of a one-year moratorium on the risk-based pricing of FHA mortgage insurance premiums. The Housing and Economic Recovery Act of 2008 provided for that moratorium, which began on Oct. 1, 2008.

The U.S. Department of Housing and Urban Development’s “Mortgagee Letter 2008-22” explains it all in greater detail.

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