Let’s break down PMI and MIP

If you’re looking to buy a home, you’ve probably come across the terms PMI (Private Mortgage Insurance) and MIP (Mortgage Insurance Premium). These are important costs to understand, as they can significantly impact your monthly mortgage payment. Let’s break down what PMI and MIP are, when they apply, and how you can minimize or avoid them.

What is PMI?

PMI, or Private Mortgage Insurance, is required by most conventional lenders when a borrower puts down less than 20% on a home purchase. PMI protects the lender in case you default on your loan. The cost of PMI can vary based on factors like credit score, loan amount, and down payment percentage, but it typically ranges between 0.5% and 2% of the loan amount annually.

How to Get Rid of PMI

One of the benefits of PMI is that it can be removed once you build enough equity in your home. In most cases:

• You can request PMI cancellation when your loan balance reaches 80% of the home’s original value.
• Lenders are required to automatically cancel PMI when your loan balance hits 78% of the original value.
• Refinancing to a loan with a lower loan-to-value (LTV) ratio may also allow you to eliminate PMI.

What is MIP?

MIP, or Mortgage Insurance Premium, is required for FHA loans, regardless of your down payment size. Unlike PMI, MIP includes both an upfront fee (UFMIP) and an ongoing monthly premium.

MIP Costs and Duration

• Upfront MIP (UFMIP): 1.75% of the loan amount, typically rolled into the mortgage.
• Annual MIP: Ranges from 0.15% to 0.75%, depending on loan terms and down payment amount.
• Duration: If you put down less than 10%, MIP stays for the life of the loan. If you put down 10% or more, you can remove MIP after 11 years.

PMI vs. MIP: Key Differences

Feature	PMI (Conventional Loans)	MIP (FHA Loans)
Who Pays?	Borrowers with <20% down	All FHA borrowers
Upfront Fee?	No	Yes (1.75% of loan)
Ongoing Cost?	Yes, until 80% LTV	Yes, for life of loan unless 10%+ down
How to Remove?	Request at 80% LTV or automatic at 78%	Must refinance to a conventional loan unless 10% down

How to Minimize or Avoid PMI and MIP

• Save for a 20% Down Payment: This eliminates PMI on conventional loans.
• Consider a Piggyback Loan: A second mortgage (80-10-10 loan) can help avoid PMI.
• Improve Your Credit Score: A higher score can lower PMI costs.
• Opt for a Conventional Loan if Possible: If you qualify, a conventional loan may offer better long-term savings compared to FHA.
• Refinance When You Can: If you started with an FHA loan, refinancing to a conventional loan once you have 20% equity can eliminate MIP.

While PMI and MIP add to the cost of homeownership, they make it possible for buyers to purchase homes with lower down payments. It’s important to understand these costs and plan accordingly. Working with a knowledgeable lender can help you choose the best loan option for your financial situation.