Mortgage Insurance Premium (MIP): Definition, Costs, Canceling

What Is Mortgage Insurance Premium (MIP)?

Mortgage insurance premium (MIP) is a type of mortgage insurance that is required of homeowners who take out loans backed by the Federal Housing Administration (FHA). Unlike conventional loans, which typically only require private mortgage insurance (PMI) if a home down payment is less than 20% of the purchase price, all FHA loans require MIP.

Understanding Mortgage Insurance Premium (MIP)

FHA-backed lenders use mortgage insurance premiums as a tool to protect themselves against higher-risk borrowers. Since FHA loans come with a down payment as low as 3.5% with a credit score as low as 580, default is a key concern.

FHA mortgages require every borrower to have mortgage insurance. Conversely, conventional loans only need private mortgage insurance (PMI) policies if the down payment amount is less than 20% of the property's purchase price. Each FHA loan requires both an upfront premium of 1.75% of the loan amount and an annual premium of 0.15% to 0.75%. Payment of upfront premiums is at the loan issuance. Determination of the exact yearly cost comes from the term of the loan, amount borrowed, and loan-to-value ratio (LTV).

Each month, the loan's payment amount will reflect the annual premium divided by 12 months along with the principal payment. Other charges usually added to the monthly fee include escrow amounts for property taxes and homeowner's insurance coverage.

Canceling Qualified Mortgage Insurance

Buyers with a conventional loan may cancel the PMI once they pay 20% of the loan's value or after the loan is 15 years old. But buyers with an FHA loan might not be able to eliminate MIP. It depends on the origination date of the loan.

• For FHA loans originated between Dec. 31, 2000, and June 3, 2013: If you have paid off at least 78% of the loan-to-value amount, you may ask the lender to cancel the MIP.
• For loans originated after June 3, 2013: If you made a down payment of less than 10% of the home's value at loan origination, you must pay the MIP for the life of the loan. The only way to remove the qualified mortgage insurance (MIP) on an FHA loan is to refinance it into a non-FHA product.

Borrowers who qualify for a conventional loan, even if they will pay private mortgage insurance, should also look at FHA loans to determine which is the better deal. Those with lower credit scores may do better with an FHA mortgage, particularly if they can make a 10% down payment. Also, some lenders may provide a separate loan to cover the down payment amount.

Check our list of the best mortgage refinance lenders and talk to your tax accountant, financial advisor, and your bank to see which loan makes the most sense for your situation.

Tax Implications of Qualified Mortgage Insurance Premiums

Until the 2017 Tax Cut and Jobs Act, mortgage insurance premiums were deductible in addition to allowable mortgage interest. The Further Consolidated Appropriations Act of 2020 allowed tax deductions for MIP and private mortgage insurance (PMI) for 2020 and retroactively for 2018 and 2019.

However, the Act expired, and mortgage insurance premiums are no longer deductible.

Your lender is required to send Form 1098 Mortgage Interest Statement to both you and the Internal Revenue Service (IRS). This form lists your mortgage payments over the past year and can affect your income tax. The total amount of the MIP or PMI premiums will be in box 5 of the form. If you are filing a return for tax years 2018, 2019, or 2020 and wish to claim a deduction for these premiums, you must itemize your deductions using Schedule A under the interest paid section.

The Bottom Line

If you want to take out an FHA loan, prepare to pay mortgage insurance premiums. While you can shorten the length of time you have to pay MIP, you can't eliminate this insurance altogether, so it's worth including it in your mortgage payment calculation for at least 11 years, if not the life of the loan, depending on your down payment amount.

Despite this, FHA loans may still be the better option for borrowers with lower credit scores or smaller down payment amounts. Consult your accountant or financial advisor when comparing home loans to see which option is better for you.