PMI and MIP Mortgage Insurance

🏠 PMI and MIP: Mortgage Insurance You Might Be Paying For

Understanding Private Mortgage Insurance (PMI) and Mortgage Insurance Premiums (MIP)

When you buy a home in the U.S. with a small down payment or an FHA loan, you’re likely paying for mortgage insurance – and it can be expensive if you don’t monitor it. There are two main types:

🔹 What Is PMI (Private Mortgage Insurance)?

Private Mortgage Insurance (PMI) is a lender-required insurance that applies to conventional home loans when the borrower puts down less than 20% of the home’s purchase price. While it’s paid by the borrower, it only protects the lender in the event of default — not the homeowner.

🧾 Why Lenders Require PMI:

With a smaller down payment, lenders assume higher risk. PMI helps mitigate that risk by reimbursing the lender if the borrower defaults before significant equity is built in the home.

💵 Typical Cost:

PMI costs typically range from 0.3% to 1.5% of the original loan amount per year. The exact rate depends on:

• Loan-to-Value ratio (LTV)
• Credit score
• Type and size of the mortgage

✅ Example:
For a $300,000 home with 10% down, the loan amount is $270,000. A 0.8% PMI rate means:

• $2,160 per year, or
• $180 added to your monthly mortgage payment

📉 How PMI Is Paid:

• Monthly premiums added to your mortgage payment
• Upfront premium (rarely, at closing)
• Combo of both, depending on lender and product

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📌 How to Cancel or Avoid PMI:

1. Make a 20% Down Payment at Purchase
Lenders waive PMI entirely for borrowers with an 80% LTV or lower at the time of loan origination.

2. Automatic Termination (Per Federal Law)
Under the Homeowners Protection Act of 1998, PMI must be automatically canceled when your LTV reaches 78%, assuming payments are current.

3. Borrower-Initiated Cancellation
You may request PMI removal once your LTV hits 80%, based on:

• Regular mortgage amortization
• Prepayments reducing the principal
• Rising property value (requires appraisal)

4. Refinance
If your home’s market value has risen, refinancing into a new loan at ≤80% LTV can eliminate PMI entirely.

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🔹 What Is MIP (Mortgage Insurance Premium)?

MIP is the government-backed equivalent of PMI and is required on all FHA loans. Unlike PMI, which is offered by private insurers, MIP is administered by the Federal Housing Administration (FHA) and follows a different fee structure.

🏦 Two Parts of MIP:

1. Upfront MIP (UFMIP)

• 1.75% of the loan amount
• Can be paid at closing or rolled into the loan balance

2. Annual MIP (paid monthly)
Rates vary based on:

• Loan amount
• Term length (15 vs. 30 years)
• Initial LTV

🧮 Typical range:
0.45% to 1.05% of the loan balance annually

✅ Example:
For a $250,000 loan, an annual MIP of 0.85% equals:

• $2,125 annually, or
• About $177/month, added to your payment

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🔁 MIP Duration Rules:

If your down payment is <10%:

• MIP lasts for the life of the loan
• You must refinance into a conventional loan (with ≥20% equity) to eliminate it

If your down payment is ≥10%:

• MIP lasts for 11 years, after which it automatically cancels (if current on payments)

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🆚 PMI vs. MIP Summary:

Feature	PMI (Conventional Loans)	MIP (FHA Loans)
Provider	Private insurers	Government (FHA)
Down payment threshold	Required <20% down	Always required
Upfront premium	Usually none	1.75% of loan amount
Annual premium range	0.3% – 1.5%	0.45% – 1.05%
Cancellation	At 80% LTV or auto at 78%	After 11 years (≥10% down) or not at all
Refinancing to remove	Often possible	Often necessary

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💡 Bottom Line:

Both PMI and MIP increase your monthly mortgage costs but do not benefit you directly – they protect lenders. Understanding when and how these insurance fees apply – and knowing your path to cancel them – can save you thousands of dollars over the life of your loan.

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