PMI, MIP, WTF:  What are the Key Differences Between Mortgage Insurances?

PMI, MIP, WTF: What are the Key Differences Between Mortgage Insurances?

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If you’re looking to buy a home and you don’t have tip-top credit or 20% to put down, your lender is likely to force you to purchase mortgage insurance. While it comes in different forms, mortgage insurance is paid for by the buyer but insures the lender in case of default.

PMI, or private mortgage insurance, is typically between 0.55% and 2.25% of the total amount of the mortgage paid annually. MIP, or mortgage insurance premium, is typically associated with FHA loans and can range anywhere from 0.45% to 1.05% depending on the length and amount of the loan as well as other factors. There is also a one-time premium charged (1.75% of the base loan) at the outset of an FHA loan that typically is rolled into the mortgage.

PMI and MIP are added expenses that don’t benefit the buyer except that it allows you to get a home loan when you otherwise may have been unable. This translates into an additional monthly fee over and above the principal and interest which will affect your monthly payment and how much house you can afford

Making sense of the differences between PMI and MIP and their associated mortgage options will help you understand what you’ll ultimately be paying for your home from month to month. 

What is PMI?

Private mortgage insurance (PMI) is insurance that you pay when you don’t have a 20% down payment to put towards your home purchase. While you’re the one paying for PMI, it benefits the lender in case of default or foreclosure. 

PMI is required when taking out a conventional loan from a mortgage lender. This differs from MIP, which is required for FHA loans (we’ll get to that in a second.) It does not apply to USDA or VA loans. 

If you do not have 20% to put down on your home or if your credit is on the lower end of the spectrum, you’ll be required to purchase PMI. PMI can range anywhere from 0.30% of the loan annually all the way up to 1.5% of the loan depending on your situation and the individual lender. 

How is PMI Calculated?

PMI is based on the amount of the loan, less the appraised value of the  purchase price. This fee, while calculated annually, is charged monthly as part of your mortgage. This payment is also coupled with homeowners insurance and automatically transferred into an escrow account to ensure prompt and ongoing payment to your lender. 

Depending on your down payment and your credit score PMI will range anywhere between 0.30% and 1.5%. 

Sample PMI

If we take 1% as an example. that means that you pay $1,000 per year for every $100,000 that you borrow. If you’ve purchased a $200,000 this translates into an extra $2,000 per year over your mortgage. 

This amount is broken down into 12 monthly payments throughout the year which would come out to about $167 per month. That amount is on top of your mortgage. If you have a 30 fixed-rate mortgage for $200,000 with a 4.25% interest rate, your monthly mortgage will be around $985 per month. This brings the total cost of your loan to around $1,152 per month. 

Remember this amount doesn’t include the required real estate taxes or homeowners insurance.

How to Get Rid of PMI

While this is a large additional cost, you aren’t required to pay PMI throughout the lifetime of the loan. Once you reach 20% equity in your home you can request to cancel PMI. You can reach 20% equity by paying down the loan as well as by having your house reappraised. If the value of your home has increased by 20% than your lender may also consider allowing you to cancel your PMI.

PMI is expensive, but for many, it is just one of the costs of home ownership.There’s a lot of debate surrounding the advantages and disadvantages of taking on a mortgage with PMI. If the value of the home raises quickly, as they often do in a hot market, then PMI is a short-term irritant for some. Some, however, may find that they aren’t able to purchase the house they really want because of the extra expense. 

Only you can decide what is right for you. When looking for a conventional loan, it’s important to shop around. Some lenders have different requirements than others. Also consider how long you’re going to have the loan, the likelihood of your home going up in value, and your ability to afford your monthly payments. Then decide if PMI is a deal breaker or something with which you can live — at least for the time being. 

Do FHA Loans have PMI or MIP?

Mortgage insurance premium (MIP) is very similar to PMI, but applies to FHA loans. An FHA loan is a mortgage offered by private lenders but backed by the Federal Housing Administration. FHA loans were created so that those with less than perfect credit who lack the means to pay a 20% down payment can still purchase a home. FHA loans are the most popular loan in the country behind a conventional loan. 

While FHA loans lower the entry bar for owning a home, they come with some added fees and conditions. The biggest of these conditions is requiring the purchase of MIP. Like PMI, MIP is insurance that is paid by the buyer but benefiting the lender should the home go into default or foreclosure. Fees are calculated annually but are paid monthly just like PMI. There are two major differences, however, between PMI and MIP. 

How is MIP Calculated?

With PMI, there is only the monthly payment, but with MIP there are monthly payments as well as a one time upfront fee. The One Time Upfront Premium is currently 1.75% that has to be paid at closing. 

Again, if you have a theoretical loan of $200,000, that one-time fee will be $3,500. The same 1.75% fee is due on all FHA loans and is not variable like your annual insurance premium. While 1.75% up front seems like a lot (and it is), that amount can be rolled into your mortgage and paid over the lifetime of the loan. 

Alternatively, that fee is considered part of your closing costs. If you negotiate with the seller to pay part of those costs, the MPI fee can be paid with those funds.

The monthly premium you pay with MIP will vary between 0.45% and 1.05% and is based on the amount of your loan and the appraised value of your home. 

Can You Get Rid of MIP?

Your monthly premium is also required for the lifetime of the loan. This is the other major difference between PMI and MIP.

While PMI can be waived after you reach 20% equity in your home, there is no such condition or option with MIP. MIP will exist for the lifetime of your loan regardless of the equity you have built into it. This is a recent change to FHA loan rules, dating back to 2013. The only way to get rid of it is to refinance your loan.

Dealing with MIP when getting an FHA loan is a fact of life. You’re going to pay more up front costs than you would with PMI from a conventional loan, but it can still be a good value. If home values rise and you’re able to refinance, it’s still possible to eliminate MIP down the road. 

Should You Buy a House with Mortgage Insurance?

PMI and MIP are going to be a requirement for a lot of  young people looking to buy a home. Between student loan debt and stagnant wages compared to cost of living increases, it would take most people years to save 20% for a down payment. There’s a good chance home prices will have risen significantly by then. While you do pay more when required to purchase either type of mortgage insurance, it does allow you to buy home you would otherwise not have the ability to purchase. 

When considering a conventional or FHA loan with either PMI or MIP, make sure you crunch the numbers and know exactly what you’ll be paying. Your lender will obviously do this as well, but it will help you in your home search since you’ll have a much better idea of your monthly payment. PMI and MIP have allowed millions of people to purchase homes who would otherwise still be renting today. Do the math and see if it’s right for you. 

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