For many, buying a home is the largest purchase they will ever make. Those who are informed have a better chance of making the right financial decisions, and knowing about "Mortgage Insurance" is important. If you’re not familiar with Private Mortgage Insurance ("PMI") or Mortgage Insurance Premiums ("MIP"), take a few minutes to read on. It could save you a lot of money down the road.
Mortgage insurance protects a mortgage company in case a customer cannot pay back their loan. Typically, mortgage insurance comes into play if your down payment is less than 20%. There are two main types of mortgage insurance: PMI and MIP. Which type your lender requires varies depending on the type of mortgage product you need.
Private Mortgage Insurance
If you have a conventional loan, you’ll typically need "Private Mortgage Insurance" when your down payment is less than 20%. The costs of PMI varies depending on down payment amount and other factors.
Mortgage Insurance Premium
Loans backed by the Federal Housing Administration (referred to as FHA loans) require MIP. Unlike PMI, MIP is required on ALL FHA loans regardless of your down payment. Also, unlike PMI, MIP is paid both upfront at closing (called Upfront Mortgage Insurance Premium or UFMIP) and as a monthly premium added to your mortgage payment. UFMIP will cost you 1.75% of the loan amount. Because FHA loans allow for lower down payments than Conventional loans, most FHA lenders allow the UFMIP to be financed into the mortgage (which may raise your interest rate). The regular monthly MIP can vary based on a variety of factors.
How can I break free of mortgage insurance payments?
For a single family primary residence, mortgage insurance will be canceled automatically once your Loan to Value Ratio reaches 78% or you reach the midpoint of your mortgage term (i.e. 15 years on a 30 year mortgage) provided you are current on your mortgage payments.
You can also request your servicer terminate private mortgage insurance when your Loan to Value Ratio reaches 80% by submitting a request in writing. You may be required to obtain a new appraisal in connection with the request to verify that your home did not lose value. In order for PMI to be cancelled, you must also have a good payment history.
MIP is a little trickier as removal will depend on the amount of your down payment and the closing date of your loan.
If you made a down payment of 10% on most recent FHA loans, you may be able to cancel the MIP payments after 11 years. If you made a down payment of less than 10%, you will need to pay MIP for the full term of the mortgage. The rules for MIP are different for FHA loans which closed before June 3, 2013. You can find details about the older MIP rules on the HUD website.
In either instance, you can remove MIP by refinancing out of an FHA loan into a conventional loan. Keep in mind that the qualification requirements for a conventional loan are different.
Ultimately, both MIP and PMI serve the same purpose—and help more homebuyers fulfill the American Dream. A licensed loan advisor can help you weigh all the factors when it comes time to apply for your loan.