What's the difference between private mortgage insurance (PMI) and mortgage insurance premium (MIP)?

By Jean Folger AAA
A:

Private mortgage insurance (PMI) is an insurance policy used in conventional loans that protects lenders from the risk of default and foreclosure, and allows buyers who cannot make a significant down payment (or those who choose not to) to obtain mortgage financing at affordable rates. If you purchase a home and put down less than 20%, your lender will minimize its risk by requiring you to buy insurance from a PMI company prior to signing off on the loan. The cost you pay for PMI varies depending on the size of the down payment and loan, but typically runs about 0.5 to 1% of the loan.

If you have monthly PMI (borrower paid), you make a premium payment every month until your PMI is either terminated (when your loan balance is scheduled to reach 78% of the original value of your home); when it is canceled at your request because your equity in the home reaches 20% of the purchase price or appraised value (your lender will approve a PMI cancelation only if you have adequate equity and have a good payment history); or when you reach the midpoint of the amortization period (a 30-year loan, for example, would reach the midpoint after 15 years).

Other types of PMI include single premium PMI where you pay the mortgage insurance premium upfront in a single lump sum, either in full at closing or financed into the mortgage; lender-paid PMI (LPMI), where the cost of the PMI is included in the mortgage interest rate for the life of the loan.

Mortgage insurance premium (MIP), on the other hand, is an insurance policy used in FHA loans if your down payment is less than 20%. The FHA assesses either an "upfront" MIP (UFMIP) at the time of closing, or an annual MIP that is calculated every year and paid in 12 installments. The rate you pay for annual MIP depends on the length of the loan and the loan-to-value (LTV) ratio. If the loan balance exceeds $625,500, you'll owe a higher percentage.

For loans with FHA case numbers assigned before June 3, 2013, FHA requires that you make your monthly MIP payments for a full five years before MIP can be dropped if your loan term is greater than 15 years, and MIP can be dropped only if the loan balance reaches 78% of the home's original price - the purchase price stated on your mortgage documents. If your FHA loan originated after June 2013, however, new rules will apply. If your original LTV is 90% or less, you'll pay MIP for 11 years. If your LTV is greater than 90%, you'll pay MIP throughout the life of the loan.

 

RELATED FAQS

  1. What's the difference between Social Security Disability Insurance (SSDI) and Supplemental ...

    Both Social Security Disability Insurance and Supplemental Security Income are administered by the Social Security Administration, ...
  2. What's the difference between housing starts and building permits?

    Both housing starts and building permits are economic indicators used to assess the health of the housing market, but their ...
  3. How does my debt-to-income (DTI) ratio affect my ability to get a mortgage?

    Find out how much your debt-to-income ratio affects your ability to get a good mortgage rate when buying a home.
  4. Can I buy a house directly from Fannie Mae (FNMA)?

    Yes; you can buy homes directly from Fannie Mae. Fannie Mae (the Federal National Mortgage Association, or FNMA) is a government-sponsored ...
RELATED TERMS
  1. Lloyd's Of London

    A British insurance market where members join hands as syndicates ...
  2. Business Broker

    A professional who specializes in the purchase and sale of companies. ...
  3. Reinsurer

    A company that provides financial protection to insurance companies. ...
  4. Pension Risk Transfer

    When a defined benefit pension provider offloads some or all ...
  5. Realtor Property Resource (RPR)

    A National Association of Realtors member benefit providing realtors ...
  6. Housing Choice Voucher Program

    The Housing Choice Voucher Program helps families with very low ...
comments powered by Disqus
Related Articles
  1. How Warren Buffett made Berkshire Hathaway ...
    Stock Analysis

    How Warren Buffett made Berkshire Hathaway ...

  2. Should You Buy Property On Leased Land? ...
    Retirement

    Should You Buy Property On Leased Land? ...

  3. 4 Overlooked Homeownership Costs
    Home & Auto

    4 Overlooked Homeownership Costs

  4. Want To Sell Life Insurance? Read This ...
    Entrepreneurship

    Want To Sell Life Insurance? Read This ...

  5. Preparing Your Finances From Natural ...
    Home & Auto

    Preparing Your Finances From Natural ...

Trading Center