Mortgage Insurance Premium (MIP) Vs. Private Mortgage Insurance (PMI): How Do They Differ?

Mortgage insurance can help make homeownership more accessible to those who aren’t able to save for a large down payment.

By paying a mortgage insurance premium as part of your mortgage payment each month, borrowers can get into a home with less than 20% down – sometimes, they can get a loan with as little as 3% down.

Private mortgage insurance (PMI) and the FHA mortgage insurance premium (MIP) are two of the most common types of mortgage insurance borrowers will encounter. Which one you’ll have depends on the type of loan you get.

Let’s take a look at MIP vs. PMI.

Mortgage lenders want to minimize the risk they take when lending money to borrowers.

When you make a down payment, not only does it lower the amount of money you have to borrow – thus reducing the lender’s potential loss if you were to default on the loan – but it also gives you a financial stake in the home. When your own money is on the line, you’re less likely to default.

The lower your down payment, the higher the risk is for the lender. This is why, if you make a down payment below 20%, you’ll often need to pay for mortgage insurance.

The type of mortgage insurance you’ll pay for will depend on what type of loan you have. If you have a conventional loan, you’ll have PMI. If you have an FHA loan, you’ll have MIP.

It’s important to understand that mortgage insurance doesn’t insure you as the borrower. PMI and MIP both provide protection for your lender if you’re unable to make your monthly payments.

PMI is for conventional loans, meaning your loan isn’t backed by a government program.

Conventional loans often fall into the category of “conforming” loans, meaning they meet the requirements to be sold to Fannie Mae or Freddie Mac.

PMI is typically required on conventional loans with a down payment below 20%. You’ll pay a portion of your annual premium each month as part of your monthly mortgage payment.

MIP is the mortgage insurance that is required on FHA loans, which are loans backed by the Federal Housing Administration.

MIP is required on all FHA loans, regardless of the size of your down payment. FHA loans require both an upfront mortgage insurance premium (UFMIP) as well as an annual premium payment, or annual MIP.

UFMIP can be financed into your loan amount. Annual MIP is paid as part of your monthly mortgage payment.

The main difference between PMI and MIP, as we’ve already mentioned, is that PMI applies to conventional loans while MIP applies to FHA loans.

But what other differences are there?

Ability To Cancel

Borrowers who put down less than 20% on a conventional loan are typically required to pay for mortgage insurance.

However, once you reach 20% equity in your home, you can request that your lender or servicer remove PMI from your mortgage. Otherwise, PMI will be cancelled automatically once you reach 22% equity.

Cancellation of mortgage insurance works differently for FHA MIP. In general, MIP can’t be cancelled unless you made a larger-than-average down payment.

If you made a down payment of 10% or more on your FHA loan, you’ll pay annual MIP for 11 years. If your down payment amount was less than this, you can’t cancel MIP and will pay for mortgage insurance throughout the life of the loan.

To cancel MIP with a low down payment, you’ll likely need to refinance into a conventional loan once you reach 20% equity.

Upfront Cost

FHA loans come with both UFMIP and annual MIP.

UFMIP is equal to 1.75% of the loan amount and can either be paid in full at closing or financed into the loan amount.

By contrast, PMI is most often paid as an annual premium, with a portion of it included in each of your monthly mortgage payments. With this set up, you won’t have any upfront costs.

However, conventional loan borrowers may have the option to pay a single mortgage insurance premium in one lump sum at closing. In this case, you’d have an upfront mortgage insurance payment, and no annual costs.

Annual Costs

In addition to the 1.75% UFMIP, FHA loan borrowers will also pay between 0.15% – 0.75% each year for their annual MIP.

The exact amount your annual MIP will cost depends on your loan amount, term and down payment.

For example, a borrower with a 30-year, $300,000 FHA loan on which they made a 3.5% down payment would have an annual MIP rate of 0.55%.

Your PMI rate will be determined by your down payment amount and your creditworthiness. Borrowers with good credit scores tend to get better rates.

PMI rates typically range between 0.1% – 2%.

Whether a low down payment conventional loan and the mortgage insurance that comes with it makes sense for you depends on your individual financial situation.

Let’s take a look at some of the typical benefits and drawbacks of this type of mortgage insurance:

Pros

• 3% down option: Conventional loan borrowers can qualify with as little as 3% down.

• Can be more affordable for borrowers with higher credit scores or higher down payments: If you have a good credit score, you could potentially get a better rate with PMI than you would with the FHA MIP, which can translate into a lower monthly payment. Likewise, if you’re able to make a down payment above the minimum amount, such as a 5% or 10% down payment, you could also save money with a conventional loan and PMI.

• Removal at 20% equity: PMI can be removed from your conventional loan once you reach 20% equity.

• No upfront premium: With standard, monthly PMI, you won’t pay an upfront premium at closing.

Cons

• Can be difficult to qualify for: FHA loans are often easier to qualify for than conventional loans. Most conventional loans require borrowers to have a credit score of at least 620, while most FHA loans require a credit score of 580.

• More expensive for lower credit scores: Even if you do qualify for a conventional loan, if your credit score is on the low end and you’re making a low down payment, you might find that PMI ends up being more expensive than what you’d get with MIP.

FHA loans, even with MIP, can be a more affordable loan option for certain borrowers.

Let’s take a look at the pros and cons of this loan type and its mortgage insurance costs:

Pros

• 5% down option: Though not quite as low as the 3% down you can get with a conventional loan, it’s still worth mentioning that FHA loans allow borrowers to make affordably low down payments, down to 3.5%.

• Good option for first-time home buyers, low-income or low-credit borrowers: If you think you’ll have trouble qualifying for a conventional loan due to low income, a low credit score or a high debt-to-income ratio, an FHA loan could help make homeownership more possible for you.

• May be more affordable than PMI if you have lower credit: Even if you do qualify for a conventional loan, if you have a fair or average credit score, you may find that you have a lower monthly payment with MIP than you would with PMI.

Cons

• You’ll pay an upfront and annual premium: MIP comes with two premiums – UFMIP and annual MIP.

• Can’t remove MIP on most loans: Unless you made a down payment of 10% or more, you’ll have to either pay MIP for the life of the loan or refinance into a conventional loan once you reach 20% equity.

It’s not so much a question of whether PMI or MIP is the right choice for you, but whether a conventional loan or an FHA loan makes the most sense for your financial situation.

Conventional loans are often a good option for borrowers with higher credit scores or those who can make larger down payments – even if they can’t make the full 20%. However, they can also be good for borrowers looking to make the absolute minimum down payment, since they allow down payments as low as 3%, compared to FHA’s 3.5%.

FHA loans, on the other hand, might be a better fit for borrowers with less than excellent credit, or borrowers with a significant amount of debt.

You might also want to consider other loan options.

If you’re eligible, VA loans offer 0% down with no mortgage insurance. These loans are only available to qualifying servicemembers, veterans and surviving spouses.

USDA loans are aimed at low- to middle-income borrowers in rural and some suburban areas. Like VA loans, USDA loans allow borrowers to get a loan with no down payment, though they do come with a form of mortgage insurance called a guarantee fee. This includes an upfront fee equal to 1% of the loan amount and an annual fee of 0.35%. Rocket Mortgage® does not offer USDA loans.

Ultimately, you aren’t going to decide which loan you should get based on its associated mortgage insurance premium alone. You need to take a look at the full picture, which includes your own financial and credit situation, to determine which loan type meets your needs and is the most affordable for you.

Ready to start the home buying or refinance process? You can apply online with Rocket Mortgage.