If you’re new to the home buying process, chances are you’re confused about the difference between private mortgage insurance (PMI) and mortgage insurance premium (MIP). Well we’re here to set the record straight for you.
Private Mortgage Insurance
PMI is an insurance policy designed to protect mortgage lenders from borrowers defaulting on their mortgage payments. PMI is commonly used in conventional loans, and allows borrowers obtain a mortgage with affordable rates without a significant down payment. In most cases, if a borrower puts down less than 20% of the purchase price, then your lender will require you to purchase PMI.
Private mortgage insurance will typically cost 0.5 to 1 percent of the price of the home loan. PMI is paid every month until:
- Your PMI is terminated. This happens when the balance of your loan reaches 78% of the original home value.
- The equity in your home reaches 20% of the purchase price, and your lender approves a request to cancel.
- The midpoint of the amortization period is reached.
PMI can be paid upfront in the form of a single lump sum, or rolled into the interest rate for the duration of the loan.
Mortgage Insurance Premium
An MIP is an insurance policy for FHA loans. If a borrower takes out an FHA loan, they will be required to purchase MIP, regardless of their down payment. The amount will be determined based on the duration of the loan, the loan-to-value ratio, and the amount put down. MIPs have 2 major components; an annual premium and an upfront premium. The annual premium rate is typically about 1.75% of the total loan amount, while the annual amount is typically about 0.85%. The upfront premium can be rolled into the total mortgage amount.
The terms by which an MIP can be canceled have fluctuated quite a bit in recent years. FHA loans originated on or after June 3, 2013 with less than 10% down will likely have to pay mortgage insurance for the duration of the loan. If you qualify, there are opportunities to rid yourself of a mortgage insurance premium by refinancing your FHA mortgage into a conventional mortgage with no PMI. FHA loans originated before June 3, 2013 may be eligible for MIP cancelation after 5 years provided they have 22% home equity, and have been current on all monthly payments.
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