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Private Mortgage Insurance (PMI) vs. Mortgage Insurance Premium (MIP)

By Jarrod Heil

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There are so many terms you need to know when buying a home that it feels like you need a mortgage encyclopedia just to keep up.

But, luckily for you, the ever-evolving internet allows those cans of worms to remain closed and gives you the gift of knowing what you’re talking about to your potential real estate agent when purchasing a home.

It’s better to know the knowledge that’s out there and go into the home-buying process with a leg up on the competition. And knowing the difference between private mortgage insurance and mortgage insurance premium can certainly help you take a step in the right direction.

What Is Mortgage Insurance?

Mortgage insurance is a policy premium put in place by mortgage lenders when the prospective homeowner puts a down payment of less than 20 percent on the home.

Mortgage insurance helps to protect the lender’s investment in the event the new homeowner defaults on the mortgage and the home falls into foreclosure.

Private Mortgage Insurance (PMI) vs. Mortgage Insurance Premium (MIP)

Private mortgage insurance and mortgage insurance premium certainly sound similar (and they are in many instances), but they do have some pretty big differences in terms of how to remove them from a mortgage and which one you may be assigned.

What Is PMI Insurance?

Private mortgage insurance (PMI) is an insurance policy required by lenders of conventional loans when a person purchasing a home puts down less than 20 percent on that new home.

PMI protects lenders in the event the homeowner eventually faults on the loan and goes into foreclosure.

The cost of PMI is usually from 0.5 percent to 2.25 percent, depending on the loan’s value, your credit score and a few other factors about your home’s location. The only way to get out of paying for PMI on a new mortgage is to put at least a 20 percent down payment on the home.

However, PMI doesn’t remain on a mortgage for the life of your loan. After you’ve been paying your mortgage for a while, you can ask the lender to reevaluate your loan amount.

If the balance of the loan is at least 78 percent of your home’s value, you have paid in 20 percent equity into your home or you reach the halfway amortization point in your loan, PMI is automatically dropped off your monthly mortgage payments.

What Is MIP Insurance?

Mortgage insurance premium (MIP) is slightly different than PMI because it only applies to FHA loans for buyers who put less than 20 percent down on the initial purchase price of the home.

With a down payment that’s less than 20 percent, the FHA assesses an upfront MIP that will be paid in conjunction with the mortgage each month.

MIP and PMI may seem eerily similar in the construct of how they’re enacted onto someone’s mortgage, but they’re very different when trying to get them off your mortgage.

MIP payments may be required for five years — whether or not you reach 20 percent equity in your home.

However, both can be dropped once the loan balance reaches 78 percent of the home’s original cost. 

When Is Mortgage Insurance Required?

In both cases of MIP and PMI, each mortgage insurance policy is only required when the homeowner puts less than 20 percent of the home’s price as a down payment.

Any buyer putting 20 percent or more down on their new home won’t have to deal with mortgage insurance.

Get a Quote Compare multiple policies to get the coverage you need at the price you want.

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