Understanding Mortgage Insurance: What’s the Difference Between MIP and PMI?

The homebuying process brings with it a lot of terms and acronyms that can be quite confusing to those unfamiliar with the industry. For instance, if you’re like the large number of homebuyers who struggle to come up with that elusive 20 percent down, you may hear the acronyms PMI and MIP while shopping for your mortgage. While they both have to do with mortgage insurance, they are handled in different ways.

A closer look at PMI

If you’re putting less than 20 percent down on a conventional loan, your lender will require you to purchase private mortgage insurance, or PMI.

I know what you’re thinking...you’re already making the biggest purchase of your life. Do you really have to consider another cost? Unfortunately, yes. The less a borrower puts down, the riskier they appear to a lender. PMI serves as protection for the lender’s investment, should the borrower default on the mortgage.

And just how much are we talking? Typical PMI rates run about 0.5 to 1 percent of your loan balance per year. But, Patty Leonard, senior residential loan officer with Independent Bank, says it could be a bit higher or lower depending on each borrower’s financial situation.

“Lenders look at factors like your down payment amount, credit score, and debt-to-income ratio to determine the PMI rate,” she said. “It’s never the same for any two borrowers.”

Typically, borrowers pay PMI in a monthly premium, but it can also be paid at closing in one lump sum.

PMI falls off automatically once a borrower reaches 22 percent equity, or 78 percent loan-to-value. Your loan amortization schedule lists the date when the insurance will be cancelled without you needing to do anything.

If you come into some extra cash, you do have the option to pay down your principal and get rid of PMI earlier. However, most experts suggest running this past your lender first to check the home’s current property value and ensure the extra principal payment would, in fact, bring the loan-to-value ratio down to 78 percent.

The flip side of the coin: MIP

While PMI goes with conventional loans, some government-backed loans charge what they call a mortgage insurance premium, or MIP.

This type of insurance premium is generally used with loans backed by the Federal Housing Administration (FHA) and the United States Department of Agriculture (USDA). Just like PMI, this insurance serves as protection for the lender against losses that result from defaults on home mortgages

“MIP is calculated a bit differently than PMI,” said Leonard. “There is an upfront fee as well as a monthly premium, and the rate is based on loan amount only. FHA borrowers pay 1.75 percent of loan amount up front and .85 percent monthly. On USDA loans, 1 percent is paid up front and .35 percent is paid monthly.”

Another difference between PMI and MIP is how long you have to pay the premium. Several years ago, FHA allowed borrowers the opportunity to drop their mortgage insurance just like the conventional markets. However, the rules have changed over the years. For any loans acquired after June 2013, with a loan-to-value greater than 90 percent, MIP remains in effect throughout the life of the loan.

So, while these two acronyms sound similar and serve the same purpose, they come with different sets of qualifications and guidelines. Understanding how mortgage insurance works is critical, and there is no better resource than a local professional lender.

To ensure you’re equipped with all the information you need before embarking on your home buying journey, visit the Greater Lansing Association of REALTORS® website at www.lansing-realestate.com for a list of experienced area service providers.