*Editor’s note: We’ve updated the post below with information regarding changes in PMI and MIP rules. For the most up-to-date information, please leave a comment below or email us at ZingBlog@QuickenLoans.com and we’ll answer your questions!

Many homeowners pay it and many home buyers try to avoid it … mortgage insurance. You may be wondering, “What’s mortgage insurance and why do I have to pay for it?” Conventional mortgages have private mortgage insurance (PMI). FHA loans have a different insurance structure, and you pay what’s called a mortgage insurance premium (MIP). Here’s more information on both, and how they may affect your payments when you purchase a home or refinance your mortgage.

What is mortgage insurance?

Mortgage insurance is required for most home loans that don’t have at least a 20% down payment. It’s bought and paid for by the homeowner, but it offers them no coverage. In a nutshell, it’s there to protect the investor (who buys the loan on a secondary market) if the loan goes into default. There are a couple of different types of mortgage insurance depending on your loan.

Conventional Loans: Private Mortgage Insurance (PMI)

As part of the loan guidelines set out by Freddie Mac, Fannie Mae and most investors in conventional loans, a borrower is required to pay PMI when at least 20% of a home’s purchase price is not provided as a down payment.

Investors view the down payment as additional evidence that you are financially prepared to take on the debt of a monthly mortgage payment. The larger the down payment, the more you can prove to the investor that you will not be at risk of joining the default statistics.

When obtaining a mortgage, it’s important that you find a loan that fits your specific situation and goals. Quicken Loans offers the PMI Advantage program, in which borrowers can choose a slightly higher interest rate to take advantage of lender-paid PMI. Learn more about PMI Advantage.

FHA Loans: Mortgage Insurance Premium (MIP)

While conventional loans have more strict underwriting guidelines, FHA-insured loans require a small amount of cash to close a loan. As a result, all borrowers must pay MIP to insure the investor against loss if the homeowner defaults on the mortgage. While there are ways to avoid PMI with conventional loans, there is no way to avoid MIP on FHA loans because the minimum down payment is only 3.5%.

Whether MIP can ever come off your FHA loan depends on a few factors, including when it was originated, the amount of your down payment, and the current loan-to-value (LTV) ratio.

For originations on or after June 3, 2013, FHA requires MIP to be paid for 11 years if your original LTV is 90% or lower, and for the life of the loan if it’s over 90%. For more details, visit this post.

MIP amounts were also decreased for all originations on or after January 26, 2015. For more information on the cuts, check out this post.

For loans originated as of October 4, 2010, if your FHA term is more than 15 years, your monthly mortgage insurance payments will be cancelled when the LTV reaches 78%. This is calculated based on the original value of your FHA home loan and only if you paid the annual MIP amounts for at least five years. If the term of your FHA loan is 15 years or less, with an LTV of 90% or greater, the monthly mortgage insurance payments will stop when the LTV reaches 78%. Mortgages with an LTV of 89.99% or less will not be charged annual mortgage insurance premiums. If your loan was originated on or after April 18, 2011, FHA made a change to their MIP factors which impacted the 15-year loan. Now, there is MIP on LTVs greater than 78%. LTVs less than or equal to 78% do not require MIP, however not all lenders have followed suit with the 0% MIP on LTVs less than 78%.

For investors, it’s true that insurance replaces the unknown with security. For home buyers and homeowners, the best strategy is to obtain a mortgage that meets your needs, your pocketbook and your financial goals.

If you have any questions on PMI or MIP, leave us a note in the comments and we’ll be happy to respond.

 

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This Post Has 55 Comments

    1. Hi Sara:

      Unfortunately, I don’t know the answer to that question because we don’t do USDA loans and I don’t want to give you the wrong information. I would recommend asking another lender that question if you’re unsure. Good luck!

      Thanks,
      Kevin Graham

  1. Just a question to appease curiosity….Pmi is the lenders safety net. What happens to the homes that go into default and the Pmi kicks in? I’m thinking that this isn’t insurance that pays the outstanding balance….just funds to to cover exoiences til its auctioned off after foreclose… Correct??

    1. Hi Mary:

      Mortgage insurance helps cover the lender’s expenses in the event of foreclosure. It helps make up for some or all of the costs incurred by the lender during the foreclosure recovery process.

      Thanks,
      Kevin Graham

  2. I have been reading websites all afternoon because I’m not getting a clear answer from my mortgage lender so I’m asking you in the hopes you can be clear. Here are the facts….

    My FHA Loan was originated Dec 10, 2010. My home’s then appraised value was 115,000 (and it hasn’t moved that much). I got a fantastic deal and my loan amount was for 87,620. I could not qualify for a conventional loan because I did not put down 20% at all. In fact, I only put down about $5000.

    Q1: Now that my LTV is below 78% and 5 years of on-time payments have passed, I am under the assumption I should no longer have to pay MIP. Correct or incorrect?

    Q2: Some have asked me if I should have had to pay MIP at all because my original loan amount was already <78% LTV. I was told and am under the impression that I did have to pay this because by definition, I had an FHA loan. Correct or incorrect.

    Thanks so much for your time and attention….

    1. Hi Mandy:

      I’m going to get this to a Home Loan Expert to look into the exact terms of your current loan and give you an answer on your MIP question because there are a lot of things that could affect this including whether you’ve refinanced and the timeline of the refinancing. Someone will be reaching out.

      Thanks,
      Kevin Graham

  3. We’re doing a refinance 30 year fixed conventional on an upside down mortgage (not FHA or HUD) at 95% LVI, payoff 91, 936, appraised for 83,000, bank is lending 78,800 we’re paying the difference, what should the PMI be?

    1. Hi S:

      It’s difficult to tell you what your PMI would be on here because PMI programs have varying rates depending on the provider of the mortgage insurance. I’m going to have someone reach out to look into your situation.

      Thanks,
      Kevin Graham

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