Mortgage insurance premium (MIP) vs. private mortgage insurance (PMI): How do they differ?

When a lender gives someone a mortgage, they’re taking on risk. Mortgage insurance helps reduce lenders’ risk, which makes it easier for buyers to qualify for a mortgage, especially if they can’t reduce the lenders’ risk in other ways, such as offering a large down payment.

With mortgage insurance, it’s possible to buy a home with a down payment under 20%, sometimes as low as 3%.

Two types of mortgage insurance are private mortgage insurance (PMI) and mortgage insurance premium (MIP). Which you use will depend on the type of loan you get. We’ll break down the key differences between the two that you need to know.

PMI and MIP: The basics

PMI and MIP are types of mortgage insurance. Lenders will sometimes require that borrowers pay for mortgage insurance when they have a smaller down payment.

The size of one’s down payment directly impacts the lender’s risk. If you make a down payment of 20%, the lender only has to lend you 80% of the home’s value. If you stop making payments and the lender has to foreclose, odds are good the lender can sell the home for enough to recoup its losses.

If your down payment is just 3%, a small decrease in the home’s value could see the lender losing money in the event of foreclosure.

Typically, PMI is required for borrowers who put down less than 20% of a home’s value.

MIP is not the same as PMI. While PMI applies only to conventional loans, MIP is an FHA mortgage insurance premium. All FHA loans, even those where the borrower makes a 20% down payment, require some amount of MIP. Still, both protect the lender if the borrower misses payments.

What is PMI?

Private mortgage insurance is a type of mortgage insurance that applies only to conventional loans, which are not backed by a government program like VA, FHA, or USDA loans.

Typically, conventional loans qualify as conforming loans, which means they meet requirements set by Fannie Mae and Freddie Mac, but they’re not insured or protected by a government agency.

PMI is usually only required if your down payment is less than 20%, and it’s usually added to your monthly mortgage payment. Once you reach a sufficient level of equity in your home, you can have PMI removed from the payment.

What is MIP?

Mortgage insurance premium is a type of mortgage insurance that applies to FHA loans, which are insured by the Federal Housing Administration. Unlike PMI, which only applies if you make a small down payment, MIP is required for all FHA loans.

There are two components of MIP: upfront mortgage insurance premium (UFMIP) and an annual premium. You can often finance UFMIP into the loan amount, but you pay the annual premium as part of your regular monthly payment.

Upfront MIP is 1.75% of the loan amount. Annual MIP is a percentage of the loan amount that ranges from 0.15% to 0.75% based on the loan’s term, loan size, and the size of your down payment.

Unlike with PMI, MIP does not automatically cancel when you reach a certain level of equity. Instead, it lasts for a set period of either 11 years or the full term of the mortgage, depending on the loan amount, loan term, and the size of your down payment.

Key differences between PMI and MIP

The key difference between PMI and MIP is that they apply to different types of loans. PMI applies to conventional loans and MIP applies to FHA loans. They also differ in other areas.

Ability to cancel

In general, PMI is much easier to cancel than MIP. Once you reach 20% equity in your home, either by paying down your loan or your house appreciating in value, you can ask the lender to cancel PMI. However, you may need to pay for an appraisal. PMI is cancelled automatically once you reach 22% equity based on the home’s value at the loan’s origination.

MIP lasts for a period of time that is set when you first get the loan. In general, if you make a 10% down payment, it lasts for 11 years. With a smaller down payment, it lasts for the life of the loan. You can only cancel MIP early by refinancing your loan.

Up-front cost

MIP requires an upfront payment of 1.75% of the loan amount in addition to a monthly cost added to your loan payment. You can pay the UFMIP at closing or roll it into your loan’s balance.

PMI typically has no upfront cost, but an upfront single-payment form of PMI is offered by some lenders.

Annual costs

The ongoing costs of PMI or MIP are added to your monthly mortgage payment, depending on which type of mortgage insurance you have.

With MIP, the amount ranges from 0.15% to 0.75% of the loan’s amount based on your loan’s term, amount, and down payment.

For example, a $300,000 FHA loan with 3.5% down on a 30-year term could have a 0.55% MIP rate. That means you’d pay $1,650 a year or $137.50 a month in MIP.

PMI rates vary based on a number of factors, including the size of your loan and your down payment. Your credit score affects your mortgage rate and your PMI rate, if your lender requires it. Typical PMI costs range from 0.1% to 2% of the loan’s amount.

Pros and cons of PMI

PMI applies to some conventional loans, so if you’re not using a government loan program, it’s important to keep the pros and cons of dealing with PMI in mind.

Pros

PMI can make homeownership possible for more people. Some benefits of PMI compared to MIP include:

• 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 might get a better rate with PMI than you would with the FHA MIP. This can translate into lower monthly payments. 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 up-front premium: With standard, monthly PMI, you won’t pay an up-front premium at closing.

Cons

PMI isn’t perfect, so keep these drawbacks in mind.

• Can be difficult to qualify for: FHA loans are often easier to qualify for than conventional loans. The credit score you need to buy a house can vary by lender. Rocket Mortgage® requires borrowers to have a credit score of 620 for conventional loans and a minimum credit score of 580 for FHA loans.
• More expensive for lower credit scores: You may qualify for a conventional loan. However, if you have a low credit score 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.

Pros and cons of MIP

If you’re applying for an FHA loan, make sure to think about how MIP will impact the cost of your loan.

Pros

FHA loans tend to be easier to qualify for than some other mortgages, and MIP is one reason for that. These are some of the pros of MIP.

• 3.5% down option: FHA loans let borrowers make lower down payments (as little as 3.5%). Though, it's not quite as low as the down payment you can get with a conventional loan (3%).
• Good option for first-time home buyers, low-income or low-credit borrowers: Do you think you’ll have trouble qualifying for a conventional loan?  An FHA loan could help make homeownership more possible for you even if you have a low income, a low credit score, or a high debt-to-income ratio.
• May be more affordable than PMI if you have a lower credit score: You might qualify for a conventional loan. Even so, if you have a fair to average credit score, you may find that you have a lower monthly payment with MIP than you would with PMI. If your credit score is lower than you’d like, you can take steps to repair your credit score.

Cons

Before getting a loan that includes MIP, consider these drawbacks.

• You’ll pay an up-front 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.

Is PMI or MIP right for you?

Whether you wind up using PMI or MIP for your mortgage depends on whether you get a conventional mortgage or an FHA loan. You can’t just choose one or the other; the decision is tied to your choice of loan.

In general, conventional loans tend to be better for people with better credit or larger down payment amounts, even if you can’t quite hit a 20% down payment. FHA loans, by contrast, are usually better for people with lower credit scores or down payment amounts. They require a down payment of 3.5%.

Note that while you can get a conventional loan with a 3% down payment, you usually want to have a larger down payment to secure the best rates.

If a lower down payments sounds like the right option for you, consider applying for an FHA loan with Rocket Mortgage®. You can also consider other types of loans that you might qualify for.

For example, service members and veterans may be able to get a VA loan through Rocket Mortgage®. These loans have no down payment requirement. USDA loans are another option if you’re buying in a designated rural area, though Rocket Mortgage® doesn’t offer USDA loans at this time.

The bottom line: MIP and PMI both have pros and cons

Whether you wind up paying MIP or PMI will depend on whether you apply for an FHA loan or conventional loan. Both forms of mortgage insurance are an additional cost that borrowers have to pay, but they help make homeownership more attainable to people with imperfect credit or smaller savings.

Ultimately, the form of mortgage insurance you pay is just one piece of the puzzle, and it shouldn’t be the sole driver in your choice between FHA loans and conventional loans. Consider the pros and cons of both loan types, then, if you’re ready to start shopping for a home, start your application today with Rocket Mortgage^®.