PMI Vs. MIP: What’s The Difference?

If you’re getting a mortgage, you’re likely aware that there can be a ton of acronyms used throughout the process. One of the most confusing conversations involves explaining PMI vs. MIP. Private mortgage insurance (PMI) applies to conventional loans with less than 20% down payments, while mortgage insurance premiums (MIP) are associated with FHA loans.

What Is Mortgage Insurance?

Mortgage insurance helps protect a lender’s investment when a borrower defaults on a loan. Mortgage insurance allows lenders to offer loans with smaller down payments to lower a common barrier to homeownership or approve refinancing with lower amounts of equity. Certain loans with more flexible credit requirements also have a mortgage insurance requirement.

How Does Loan-To-Value Ratio (LTV) Affect Mortgage Insurance?

For loans with mortgage insurance requirements that change based on the down payment or equity amount, lenders often use your loan-to-value ratio (LTV) to explain your options. Think of LTV as the inverse of your down payment or equity amount. For instance, a 20% down payment means starting your loan with 80% LTV.

What Is PMI?

Private insurers provide private mortgage insurance (PMI) to mortgage lenders on conventional loans. Borrowers pay PMI in exchange for making a lower down payment. The insurance is required when the down payment or equity amount is less than 20%, and it compensates the lender if a borrower defaults on a loan.

How Do You Pay PMI?

There are several ways to pay PMI, including:

The insurance rate you pay will depend on what you negotiate with your lender and insurer and factors like your LTV and credit score, the loan term and how the property is occupied.

What Is MIP?

Mortgage insurance premiums (MIPs) are associated with Federal Housing Administration (FHA) loans. All FHA loan borrowers pay MIP regardless of their down payment or equity amount. As with conventional loans, FHA mortgage insurance compensates lenders in case of defaults. The MIP payments go directly to the FHA to fund and operate the mortgage insurance program and compensate lenders when necessary.

How Do You Pay MIP?

There are two types of MIP, and the FHA sets their rates.

What Are The Differences Between PMI And MIP?

The biggest difference between PMI and MIP is that PMI is associated with conventional loans and MIP is associated with FHA loans – which is a handy way to know which one you have. But they have other distinctions that separate them, too.

Upfront Costs 

FHA loans require a standard upfront mortgage insurance payment that’s 1.75% of the total loan amount. You can pay the premium at closing or roll it into your mortgage loan.

 

PMI doesn’t require an upfront payment. However, if you opt for single-pay PMI, you’ll pay the entire premium upfront at closing.

MIP And PMI Annual Costs

The FHA sets MIP rates based on the size of your loan and your loan’s LTV. As of 2023, for a borrower with a 30-year FHA mortgage:

For example, if you take out an FHA loan for $300,000 and make a 3.5% down payment, you’ll pay $1,650 a year or $137.50 a month for the life of the loan.

Lenders set PMI rates according to the size of a loan and a borrower’s creditworthiness. Typically, PMI costs are in the 1% – 2% range of your total loan amount.

If you take out a $300,000 conventional loan and your PMI is 1.5%, your annual PMI would be $4,500, and your monthly mortgage insurance payment would be $375.

Ability To Cancel

You can ask your lender to stop charging PMI when your LTV reaches 80%, but it’s automatically canceled once your LTV hits 78%. However, the equity threshold to cancel LTV may be higher for a multifamily or investment property.

Most FHA borrowers pay FHA mortgage insurance for the entire loan term. The exception is when it’s canceled after 11 years because the borrower made at least a 10% down payment.

 

It’s important to note that the life of the loan doesn’t mean the life of the home. One way FHA borrowers with permanent MIP remove it is to refinance into a conventional loan after they’ve reached the 20% equity threshold to avoid paying PMI when they refinance.

MIP Vs. PMI: The Pros And Cons

From your credit score to your debt-to-income ratio (DTI), several factors will influence which mortgage you choose. PMI and MIP are also factors that can play a part in determining which loan is right for you. That’s why it’s important to understand their pros and cons.

PMI Pros

PMI allows lenders to expand access to conventional loans for many borrowers while protecting themselves from any financial risk they assume. Here are the benefits:

 

PMI Cons

PMI certainly has a few drawbacks, including:

 

MIP Pros

Here are some advantages of MIP:

 

MIP Cons

MIP also has a few disadvantages, including:

The Bottom Line

Mortgage insurance payments have their advantages and disadvantages. While they may increase a borrower’s monthly mortgage payment, they also help millions of prospective home buyers become homeowners with smaller down payments.