PMI vs MIP: What They Are And How They Differ
When buying a house, it’s easy to feel every step in the process is filled with completely foreign terms. Two acronyms you’ll hear thrown around about your mortgage are private mortgage insurance (PMI) and mortgage insurance premium (MIP). Some people confuse the two or think they’re the same thing, but that isn’t the case. These are two different types of mortgage insurance added to specific home loans under defined conditions. Learn what PMI and MIP are and their key differences.
PMI vs MIP: What They Share
These mortgage insurance programs are there to protect the lenders. Any home buyer who lacks sufficient equity is considered a financial risk. With less equity in the home, they have less incentive to keep making payments on their loans should their financial situation change.
PMI and MIP act as an insurance policy that if the buyer fails to make their payments on time, the mortgage lender will recoup some of their costs. The only real benefit to the home buyer is that it allows them to become first-time home buyers. Both programs add to the lifetime borrowing costs.
How Private Mortgage Insurance Works
If you’re using a conventional loan but can’t afford a down payment of at least 20%, you can still get a home loan. Some first-time home buyer loans have generous terms as low as 3% down. However, you’ll have to pay private mortgage insurance (PMI) each month. This protects the lender should the borrower default on the loan.
Typically, this type of insurance costs somewhere between 0.5% and 2% of the loan. The exact fee will depend on the size of your mortgage and the down payment. If you’d prefer, you can pay off the PMI in a lump sum as part of the closing costs on your home rather than over time. However, this will add to your upfront costs when buying a home.
Borrower-paid PMI is an annual premium divided over the twelve-monthly mortgage payments. Lender-paid PMI is where the lender pays the PMI but charges a higher mortgage rate. It also likely won’t drop the PMI when the home equity reaches 78%.
Paying PMI doesn’t last forever. Generally, once your loan balance reaches 78% of your home’s initial value, you own 20% equity in your home, or you are halfway through your amortization period, you won’t have to pay for private mortgage insurance any longer. Some home loans with lender-paid mortgage insurance wrap the PMI into the interest rate. In that case, you may need to refinance to remove the PMI from the loan.
PMI can help first-time homebuyers get into their first home even if they don’t have enough saved for the 20% downpayment benchmark. While you’ll have a higher mortgage balance and likely pay more in monthly costs, it reduces barriers to homeownership.
How Mortgage Insurance Premiums Work
PMI can be applied to various loan options, but not MIP. Mortgage insurance premium (MIP) specifically refers to FHA loan insurance. You may also hear it called Upfront Mortgage Insurance (UFMI). Once again, it’s required if you make a down payment of less than 20% on a FHA program loan. Like PMI, it helps minimize the risks to your lender should you default on the loan.
The price you pay for MIP works slightly differently than PMI as it’s broken into two parts. The first part is known as the upfront mortgage insurance payment. This premium is a flat percentage. As of 2024, the upfront mortgage insurance premium is 1.75% of a home’s value. Note: that is not the loan amount.
In addition to the upfront premium, you’ll pay monthly insurance premiums. The monthly payments are based on factors including your loan-to-value ratio, the length of your loan, and its base amount.
Unlike private mortgage insurance, you usually have to continue paying MIP the entire loan term unless you put down more than 10% or you refinance your home to a conventional loan. If you can refinance with a better down payment and improved credit, you shouldn’t worry about making any more MIP payments.
Find Out if PMI or MIP is Best for Your Needs
So which one is right for you? Everyone’s situation is different, and it definitely depends on what loan you opt for. Many people prefer a conventional loan with PMI because it offers greater flexibility than MIP. It also usually has lower rates, and you typically aren’t stuck paying it over the life of the loan. PMI is also available with more loan types, while MIP is on FHA-backed loans.
If you’re not sure what to do, we can connect you with a local Mortgage Professional who can help! They will walk you through both these options or help you determine if you can afford a 20% down payment to help you avoid both insurance altogether.
FAQs
Does my credit score matter for PMI or MIP?
Credit scores do not factor into the rate you pay for private mortgage insurance or mortgage insurance premiums. That depends on the home loan value and your down payment. Your credit score can impact the interest rate mortgage lenders offer you. Those with excellent credit receive more favorable mortgage rates.
What if my financial situation changes?
Financial situations can improve over time or become stressed, like if you lose your job. In the latter, your options depend on how much it has improved and how close you are to reaching your home mortgage’s 20% loan-to-value threshold. If the current mortgage rates are better than your original loan, you could save up the money to wrap into a refinance loan. That way, you’ll benefit from lower monthly payments and get rid of PMI. Or, if you’re still a ways from that threshold and interest rates are higher than your current home loan, it may be better to make additional monthly or lump sum payments on the principal balance to build up sufficient equity. Remember to factor in any home appreciation, too, when considering if it’s time to refinance to more favorable terms.
What is the annual cost of PMI vs MIP?
Private mortgage insurance usually runs 0.5-1.5% of the mortgage cost annually. MIPs vary, with 2024 typical rates falling 0.15% to 0.75% of the loan amount. The exact amount, then, depends on your mortgage terms. You’ll look at your PMI rate and your home loan amount. All loans have an amortization schedule; this can be helpful in figuring out what your annual mortgage insurance premiums are.
Does my downpayment size impact what I pay in PMI or MIP?
For mortgage insurance premiums, it can impact how long you’ll make monthly installments of MIP. If you put down more than 10%, you may only pay monthly mortgage insurance premiums for 11 years. If you put down less, you’ll likely pay MIPs for the life of the loan. That increases your loan cost. PMI impacts your payment size and how long it will take you to reach 20% of your home’s value, which you can request to be removed from your loan.
Do all FHA-backed mortgage loans require mortgage insurance premiums?
No. FHA loans only apply mortgage insurance premiums for high-risk borrowers, which they consider any loan where the mortgage amount is more than 80% of the home’s appraised value.
Do jumbo loans require PMI?
Not all jumbo loans require private mortgage insurance, even if the borrower puts down less than 20% or 30% of the home’s appraised value.
Updated November 2024
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Preston Guyton
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