Mortgage insurance premiums and private mortgage insurance help lenders extend mortgages to customers who may not otherwise qualify for a loan. They do this by protecting lenders against loses that may occur when a borrower defaults on a loan.
Mortgage insurance premiums apply to FHA loans, which are guaranteed by the federal government. Private mortgage insurance applies to conventional loans when you make a down payment of less than 20%. Conventional loans are mortgages offered by private lenders without a government guarantee. You may be required to buy mortgage insurance when you get a loan to purchase a house as well as when you refinance. Let's talk about the difference between MIP and PMI.
FHA MIP vs. conventional PMI
One important difference between the mortgage insurance requirements for FHA and conventional loans is the upfront funding fee. Every person who buys a house with an FHA loan has to pay an upfront premium of 1.75% of the purchase price of the house. That means if you a buy a house that costs $250,000, you have to pay a mortgage insurance funding fee of $4,375. Conventional loans have no upfront mortgage insurance premium.
Another important difference between MIP and PMI are the monthly insurance premiums. Every person who buys a house with an FHA loan must pay monthly insurance premiums in addition to the 1.75% up front insurance premium. The cost of MIP depends on the term of your mortgage, the amount of your base loan amount, and your loan-to-value ratio (LTV). While the cost of the annual premium can vary from borrower to borrower, the annual cost of MIP generally runs between 0.45% and 1.05% of the loan amount.
Unlike FHA loans, not every person who buys a house with a conventional loan is required to buy private mortgage insurance. If you make a down payment of 20%, you do not need to pay for PMI. If you make a down payment of less than 20%, the lender will require you to pay PMI. The cost of PMI is affected by factors like your credit score and the amount of your down payment. The cost can vary from borrower to borrower and generally runs between 0.5% and 2% of the loan amount of the mortgage.
The final important difference between MIP and PMI is the length of time you are required to pay it.
If you buy a house today with an FHA loan, you will be required to pay MIP for at least 11 years. If you make a down payment of less than 10%, you will need to pay MIP throughout the life of the loan.
The requirements for PMI are different. Borrowers can request lenders cancel private mortgage insurance after their home's equity reaches 80%. Canceling PMI at 80% equity typically requires you to contact your lender and request the insurance be removed. Lenders should automatically cancel PMI when your equity reaches 78%. Depending on how quickly you pay down the principal on your loan, or how quickly the market value of your house increases, you may need to pay PMI for only a few years. Here is a quick comparison of some of the important differences between MIP and PMI.
|Loan Type||FHA Loans (MIP)||Convention Loans (PMI)|
|Government guaranteed loan||yes||no|
|Mortgage Insurance required for all loans||yes||no|
|Upfront funding fee||1.75% of purchase price||none|
|Annual cost of mortgage insurance||varies by borrower||varies by borrower|
|Years mortgage insurance required||11 years or more for new loans||varies by borrower|
Is MIP or PMI more expensive?
Because many factors affect the cost of mortgage insurance premiums and private mortgage insurance, and these factors can be different for each person, a good way to estimate the relative costs of MIP vs PMI is to speak with a mortgage professional. Freedom Mortgage's Loan Advisors will be happy to answer your questions about mortgage insurance premiums and private mortgage insurance, and the home loans that go with them.
How to cancel mortgage insurance premiums (MIP)
If you made a down payment of 10% on most recent FHA loans, you may be able to cancel the MIP payments after 11 years. If you made a down payment of less than 10%, you will need to pay MIP for the full term of the mortgage. The rules for MIP are different for FHA loans which closed before June 3, 2013. You can find details about the older MIP rules on the HUD website.
Many homeowners cancel MIP payments by refinancing their mortgage from an FHA loan to a different kind of loan. Keep in mind that refinancing usually comes with new closing costs, which you will have to pay, and that you will want enough home equity to avoid paying mortgage insurance on your new loan. Make sure you understand all the potential costs and savings of a refinance to cancel MIP before you make a decision, so you are confident it is a good choice.