PMI Vs. MIP: What’s The Difference?

If you’re getting a mortgage, you’re likely aware that there can be a ton of acronyms used throughout the process. One of the most confusing conversations involves explaining PMI vs. MIP. Private mortgage insurance (PMI) applies to conventional loans with less than 20% down payments, while mortgage insurance premiums (MIP) are associated with FHA loans.

What Is Mortgage Insurance?

Mortgage insurance is designed to help protect a lender’s investment if the borrower defaults on their loan. In practice, it allows lenders to make loans to borrowers with lower down payments or amounts of equity, which lowers the barrier to entry for homeownership or refinancing. Certain loans with more flexible credit requirements also have automatic mortgage insurance.

For those loans that have mortgage insurance provisions that change based on down payment or equity amount, you may hear lenders refer to your options based on your loan-to-value ratio (LTV). You can think of LTV as the inverse of your down payment or equity amount. For instance, having a 20% down payment means starting your loan with 80% LTV.

What Is PMI?

Private mortgage insurance (PMI) is provided by private insurers to mortgage lenders on conventional loans. Borrowers pay it in exchange for the ability to make a lower down payment. It’s intended to compensate the lender if you default on your loan and is required when the down payment or amount associated with the loan is less than 20%.

If you end up paying PMI, there may be a few different ways to pay it. You can have monthly payments, but you can also do one big payment or have it paid by the lender in exchange for a higher interest rate.

The rate you pay is dependent on negotiations between your lender and the insurer as well as things like your LTV and credit score, the length of your term and how the property is occupied.

What Is MIP?

Mortgage insurance premiums (MIP) are associated with FHA loans. They’re paid by the borrower as well and are required on all FHA loans regardless of down payment or amount. As with conventional loans, these are intended to compensate for default. However, unlike PMI, the payments go directly to the FHA, so the Federal Housing Administration is compensated.

What’s the Main Difference Between PMI And MIP?

The biggest difference between PMI and MIP is that PMI is associated with conventional loans while MIP is associated with FHA loans, so that’s a good way to know which one you have. However, many other details separate the loans, too.

While PMI may be removed once you reach a certain equity amount, there’s a limited exception in which MIP is not permanent. Additionally, MIP has both an upfront mortgage insurance premium of 1.75% of the loan amount that can be paid at closing or built into the loan. There are also annual premiums that are split into monthly payments.

The amount of your annual MIP depends on your initial down payment or equity amount. Rates are set by the federal government.

When it comes to PMI, there are no required upfront payments although there are several ways to pay your PMI.

• Borrower-paid PMI (BPMI): Annual premiums are split into monthly payments.
• Lender-paid PMI (LPMI): The lender pays the premium in exchange for giving you a slightly higher rate.
• Single-pay PMI: In this arrangement, you pay some or all of your premium upfront at closing for a lower or no monthly PMI charge.

Can You Remove PMI And MIP?

BPMI can be removed once you reach certain equity amounts. LPMI is never removable because it involves a higher rate for the term of the loan.

The exact requirements for removal depend on how you’re occupying your property, the number of units in your residence and whether your loan is owned by Fannie Mae or Freddie Mac.

For more on when you can remove PMI, check out the table below. All percentages are based on LTV. Recall that LTV is your down payment or current equity amount subtracted from 100%.

When you request removal, you’ll need to have an appraisal or broker price opinion done. This verifies the value of the property. Additionally, this deals with requests. You’ll have to write an old-fashioned letter because the law is behind the times. Talk to your servicer about exactly what needs to be said.

For 1-unit primary homes and second homes, there is also an auto cancellation when you reach 78% LTV based on the original amortization schedule. That means you haven’t made extra payments to get to that point. It will also auto cancel when you reach the midpoint of your term. It’s just a matter of which happens first.

In most cases, the MIP associated with FHA loans sticks around for the life of the loan. The exception is that it’s removed after 11 years if you make a down payment of 10% or more.

Additionally, MIP may automatically be removed on loans originated before June 3, 2013, if the LTV reaches 78% or less based on the original value of the home. For terms other than 15 years, you must have paid MIP for at least 5 years.

It’s important to note that life of the loan doesn’t mean life of the home. One way FHA borrowers with a permanent MIP can have it removed is to refinance into a conventional loan once they reach 20% equity, assuming they qualify and the payment makes financial sense.

MIP Vs. PMI: The Pros And Cons

There are pros and cons to both PMI and MIP that may influence which type of mortgage you choose. While understanding these is helpful, there may also be other influences like your credit score or debt-to-income ratio (DTI) that also play a part in determining which loan is right for you.

PMI Pros

PMI enables lenders to put conventional loans within reach for many while also not compromising too much on risk tolerance. Here are the benefits:

• Flexible down payment: Depending on factors like qualifying income and first-time home buyer status, PMI payments mean that lenders are able to offer conventional loan options with down payments between 3% – 5% for a 1-unit primary property. Otherwise, the down payment would be 20% or more.
• Removable: Although it can vary based on whether you’re having PMI removed based on the original value or the current value of the home, PMI can be removed once you reach 20% equity in your home. If you don’t request that it come off, this automatically happens at 22% equity. Speak with your servicer for instructions.
• Lower interest: Conventional loans are often considered less risky than FHA loans because credit score requirements and DTI requirements can be stricter. Given this, depending on your credit score and down payment, you may receive a lower interest rate with a conventional loan than an FHA loan.

PMI Cons

While it has its pros compared to MIP, there are certainly drawbacks that come with PMI. These include the following:

• Competitive qualifications: PMI is only associated with conventional loans, which feature more stringent qualification requirements including the need for a higher credit score and lower DTI. They can be harder to qualify for than FHA loans.
• Additional monthly payment: If you have BPMI, you’ll have an additional fee escrowed every month for your PMI payment, at least until you reach 20% equity in your home.
• LPMI higher rates: If you choose to have the lender pay your PMI to avoid the additional monthly payment, it’s a higher rate for as long as you have that loan.

MIP Pros

MIP also has benefits:

• Low down payment: Because the FHA is collecting upfront and annual MIP, they can allow lenders to offer loans with lower down payments while fully backing them up should you default.
• Lower interest rates: The existence of MIP also allows lenders to offer lower interest rates to borrowers who might otherwise get less favorable terms based on not having as much for a down payment or having past credit challenges. These loans can also offer more flexibility if you’re just building your credit.

MIP Cons

It has its advantages, but MIP also has a couple of downsides, including the following:

• Difficult to remove: Unless you make a 10% down payment, monthly mortgage insurance payments are permanent on FHA loans originated on or after June 3, 2013.
• Premiums: There’s both an upfront MIP payment of 1.75% that’s built into the loan amount or paid at closing and annual premiums that are split into monthly payments, often for the life of the loan. The premiums you pay can be based on the purpose of the loan as well as the loan amount and the LTV when you close. This means higher monthly mortgage payments.

The Bottom Line

Mortgage insurance payments may not be popular, but the advantage is that they enable you to make a lower down payment by taking some of the risk off lenders.

PMI, or private mortgage insurance, is associated with conventional loans and can often be removed once you reach 20% equity in your home. There are also several payment options including one allowing you to take a higher rate in exchange for no additional monthly fee.

MIP on the other hand is for FHA loans and features monthly premiums. It stays for the life of the loan unless you make a 10% down payment. However, one way to get rid of it would be to refinance into a conventional loan once you reach 20% equity if you qualify.

Now that you know the basics of mortgage insurance, you can get started by applying online or give us a call at (888) 452-0335.