PMI vs MIP: What's The Difference?

PMI vs. MIP: Understanding the Difference in Mortgage Insurance

When buying a home with a mortgage, you may encounter the terms Private Mortgage Insurance (PMI) and Mortgage Insurance Premium (MIP). These are both types of mortgage insurance, but they apply to different loan types and serve different purposes. Understanding their differences can help you make informed decisions about your loan options.

What is Private Mortgage Insurance (PMI)?

PMI is required for conventional loans when a borrower puts down less than 20% of the home’s purchase price.

• Purpose: Protects the lender in case the borrower defaults.

• Who Pays: The borrower pays for PMI, either as part of their monthly mortgage payment, as an upfront fee at closing, or a combination of both.

• Cost: Typically ranges from 0.5% to 2% of the loan amount per year, depending on factors like credit score and down payment amount.

• How to Remove It: PMI is not permanent; it can be removed once the borrower reaches 20% equity in the home or automatically drops off when the loan balance reaches 78% of the original home value.

Example: Jane buys a $300,000 home with a 10% down payment ($30,000). Since she put down less than 20%, her lender requires PMI, which costs her an additional $150 per month. After a few years of paying down her loan and home appreciation, her loan balance reaches 80% of the home’s value, and she requests to cancel PMI.

What is Mortgage Insurance Premium (MIP)?

MIP is required for FHA loans, regardless of the down payment amount.

• Purpose: Protects the lender in case the borrower defaults on an FHA-backed loan.

• Who Pays: The borrower pays MIP in two parts: an upfront premium at closing and an annual premium included in monthly payments.

• Cost: The upfront MIP is 1.75% of the loan amount, and the annual MIP ranges from 0.45% to 1.05%, depending on the loan amount, term, and down payment.

• How to Remove It: Unlike PMI, MIP is often permanent. For loans with less than 10% down, MIP lasts for the entire loan term. If the borrower puts 10% or more down, MIP can be removed after 11 years.

Example: Mark buys a $250,000 home using an FHA loan. He pays an upfront MIP of $4,375 (1.75% of $250,000) at closing and an annual MIP that adds about $175 to his monthly mortgage payment. Since he put only 3.5% down, his MIP will remain for the life of the loan unless he refinances into a conventional loan later.

Key Differences Between PMI and MIP

Feature	PMI (Private Mortgage Insurance)	MIP (Mortgage Insurance Premium)
Applies To	Conventional loans	FHA loans
When It’s Required	Down payment less than 20%	Required for all FHA loans
Payment Type	Monthly, upfront, or both	Upfront & monthly payments
Cost	0.5% - 2% of loan annually	1.75% upfront + 0.45% - 1.05% annually
Can It Be Removed?	Yes, at 20% equity or when loan balance reaches 78%	Only if 10%+ down (removable after 11 years), otherwise permanent
Best for Borrowers Who…	Have a strong credit score and can eventually remove PMI	Need a lower down payment and qualify for FHA loans

Which One is Better for You?

• If you qualify for a conventional loan and can put close to 20% down, PMI is the better option because you can remove it over time.

• If you have a lower credit score or need a lower down payment, an FHA loan with MIP may be your best choice, but remember that the insurance may be permanent.

• Refinancing into a conventional loan later can help FHA borrowers eliminate MIP once they have enough equity.

Final Thoughts

Understanding the difference between PMI and MIP can help you choose the best mortgage for your situation. Working with an experienced Realtor and lender can ensure you make the right financial decision for your home-buying goals.

Need expert guidance? Contact me today to explore your loan options and start your homeownership journey with confidence!