There are similarities between private mortgage insurance and mortgage insurance premium programs, but the two also have some key differences. Both are designed to protect the lender in case you default on your mortgage payments, but they are not structured quite the same and they are each subject to very different guidelines. If you don’t have at least 20 percent down on the property  you’re buying, chances are that you’ll wind up paying private mortgage insurance (PMI) or a mortgage insurance premium (MIP) for several years. Here’s what you need to know to ensure you’re making the best financial decisions as you shop for a mortgage.
Does PMI and MIP Apply to All Mortgages?
If you’re taking out a conventional mortgage and don’t have at least a 20 percent down payment, then your loan to value ratio (LTV) is more than 80 percent. In that case, you’ll most likely be required to carry PMI until your LTV reaches at least that point. To calculate your loan-to-value ratio, simply divide your current mortgage principal balance and divide it by the purchase price (or the appraised value, depending on your lender) of your home.
Federal Housing Administration (FHA) loans are designed for borrowers who have very small down payments, so almost all FHA mortgage loans are required to carry insurance on their mortgages. The FHA insurance is called a mortgage insurance premium or MIP. If you’re taking out a Veteran’s Administration (VA) loan, you will not be required to take out mortgage insurance, no matter how small your down payment is.
How Long Do I Have to Pay for Mortgage Insurance?
The duration of the mortgage insurance on a loan is one of the key differentiating factors between private mortgage insurance and mortgage insurance premium. For conventional loans, you must pay PMI until your LTV reaches at least 80 percent or until you are midway through your mortgage amortization term regardless of the LTV, or whichever comes first.
If you take out an FHA mortgage loan after June, 2013, and your LTV is 90 percent or less, you’re in luck. You’ll only have to pay MIP for a minimum of 11 years. If your LTV is greater than 90 percent, then the FHA requires that you pay MIP for the life of the mortgage. The only way to get rid of those payments is to refinance the loan.
Do PMI and MIP Have Any Up-Front Costs?
PMI is usually paid monthly by the borrower as part of their regular mortgage payment, but there are other options. If you have a lot of cash to play with when you purchase your home and you want to keep your monthly payments low, you may be able to opt for a single-premium PMI and pay those premiums up-front in a single payment. Use caution when considering this type of structure. If your home value appreciates either through natural market fluctuations or home renovations and that normally would allow you to terminate the PMI early, it’s too late. You’ve already paid for all of the PMI and you will not be reimbursed for any of it.
When taking out an FHA loan, you may negotiate to pay the premiums in monthly installments or take advantage of an up-front mortgage insurance premium (UPMIP) and pay the entire amount in one lump sum. UPMIP is generally required for the bulk of the FHA’s single-family mortgage insurance programs.
Do PMI and MIP Cost the Same?
How much you’ll pay for PMI depends on your LTV, your credit score and any other financial assets you may have. Lenders of conventional mortgages tend to look at the overall picture instead of just your down payment. Expect to pay anywhere from $30 to $70 per month for each $100,000 borrowed. If you purchase a home for $200,000 and you put 20 percent down, you won’t be required to pay PMI. If it’s a 30-year fixed-rate mortgage at 4.5 percent interest, you’ll wind up paying $810.70 per month. On that same mortgage if you only put 5 percent down, your mortgage payment will be $962.70 per month plus an additional $80.75 in PMI for a total monthly payment of $1,043.45.
For FHA loans, expect UPMIP to be equivalent to 1.75 percent of your mortgage loan principal amount. Your annual mortgage insurance premiums will be .85 percent of your mortgage principal if your loan originated after January, 2015.
Is It Difficult to Cancel PMI or MIP?
Although your conventional mortgage lender only requires you to carry PMI until your LTV reaches 80 percent, the Homeowner’s Protection Act doesn’t require them to terminate the insurance until your LTV reaches 78 percent. Even then, it may take some work on your behalf. You must make your request in writing and you may be asked to have a new appraisal done on your home to prove that it has not declined in value since you took out the loan.
For an FHA loan that only requires you to carry MIP for 11 years, you may have to go through these same steps. For most FHA mortgages, however, cancelling MIP is not an option. If you want to get rid of the payment, you’ll have to go and refinance the loan to stop the MIP.
If you don’t have a large down payment for your home, really take some time to figure out your best options. Since most borrowers must pay MIP for the life of their mortgages, it quite often makes good financial sense to go the conventional mortgage route. Understanding the differences and the costs of private mortgage insurance and mortgage insurance premium programs is a good first step.
2 Point Highlight
Lenders of conventional mortgages tend to look at the overall picture instead of just your down payment.
PMI is usually paid monthly by the borrower as part of their regular mortgage payment, but there are other options.
