PMI and MIP: What They are and How They Differ

PMI and MIP: What They are and How They Differ

Parachute with Mortgage Insurance

When you’re buying a house, it’s easy to feel like every step in the process is filled with brand-new terms that are completely foreign to you. Two of the terms you’ll hear thrown around in relation to 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 actually isn’t the case. These are two different things and it’s important to understand where they differ. Let’s take a look at what PMI and MIP are and how they compare.

How Private Mortgage Insurance Works

If you’re using a conventional loan to finance your home and you can’t afford a down payment of at least 20%, you’ll have to pay private mortgage insurance each month. This protects your lender from you defaulting on your loan. 

Typically, this type of insurance will cost somewhere between 0.5% and 2% of your loan, although it will vary depending on the size of your mortgage, your down payment, and your loan-to-value ratio. If you’d prefer, you have the option of paying off your PMI in a lump sum when you close on your home rather than over time.

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 longerHow Mortgage Insurance Premiums Work

On the other hand, mortgage insurance premium specifically refers to insurance for FHA loans. Once again, it’s needed if you’ve made a down payment of less than 20%, and it helps minimize the risks to your lender. 

The price you pay for MIP works a little differently than PMI as it’s broken into two parts. The first part is known as the upfront premium and it’s a flat percentage. Right now, the upfront premium is 1.75% of a home’s value. In addition to the upfront premium, you’ll have to pay monthly insurance premiums. Your monthly payments are based on a variety of factors including your loan-to-value ratio, the length of your loan, and its base amount.

Unlike with private mortgage insurance, you will usually have to continue paying MIP unless you fully refinance your home. If you can refinance with a better down payment and improved credit, you shouldn’t have to worry about making MIP payments anymore.

Find Out if PMI or MIP is Best for Your Needs

So which one is right for you? Everyone’s situation is different. Many people prefer PMI because it offers greater flexibility than MIP. It also usually has lower rates, and you typically aren’t stuck paying it forever. 

If you’re not sure what to do, the Carolina Mortgage Team at Revolution Mortgage can help! We can walk you through both these options, or help you figure out if you can afford a down payment of 20% to help you avoid both the insurance altogether. Don’t try to make these important decisions all on your own. Utilize our expertise by calling us and applying for your loan today!

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