real estate

5 tips for the first-time homebuyer

FHA or PMI?
FHA or PMI?

Mortgages insured by the Federal Housing Administration, called FHA loans, have been a popular choice for first-time homebuyers in the past few years. And FHA loans are still attractive because they offer reasonable qualifying guidelines and credit score flexibility, and allow a minimum down payment of just 3.5 percent of the home's purchase price.

However, a recent increase in the annual premium for FHA mortgage insurance -- required on all FHA loans -- has made a conventional loan with private mortgage insurance, or PMI, a cheaper choice for most borrowers. That's according to Jay Dacey, a mortgage broker at Metropolitan Financial Mortgage Co., in Minneapolis. Borrowers who can meet the tighter guidelines for a conventional loan and, in most cases, muster up a larger down payment can save as much as $50 to $100 a month, Dacey says.

PMI, paid for by the borrower, protects the lender from a loss if the borrower defaults on the loan. The premium can be paid monthly, wrapped into a higher interest rate or financed upfront as part of the loan amount.

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