What's the difference between PMI and MIP?
Private Mortgage insurance (PMI) is required by mortgage lenders when a homebuyer/borrower makes a down payment of less than 20% of the property’s purchase price. PMI is unique to conventional loans (for instance, loans that are not government-insured, such as FHA, VA, and USDA).
Mortgage Insurance Premium (MIP) is required for most Federal Housing Administration (FHA), single-family mortgage loans. At the start of the loan, the borrower will pay an upfront fee that is equal to 1.75% of the loan amount. The borrower will also pay an annualized premium that is added to the monthly mortgage payment.
At Credit Union of Southern California (CU SoCal), we make getting a mortgage easy!
Call 866.287.6225 today to schedule a no-obligation consultation and learn about our mortgages, home equity lines of credit, auto loans, personal loans, checking and savings accounts, and other banking products. As a full-service financial institution, we look forward to helping you with all your banking needs.
Read on to learn more about the difference between PMI and MIP.
Get Started on Your Mortage Today!
What is mortgage insurance?
Mortgage insurance protects the mortgage lender or property titleholder from financial loss due to borrowers who may be unable to make their monthly payments.
You may be surprised to learn that mortgage insurance actually benefits homebuyers. The premiums lenders collect help the lender lower their financial risk when they lend to people with lower credit scores and greater risk of defaulting on the loan. This insurance allows more people to qualify for a mortgage, even if they have lower credit scores and/or have less money to use as a down payment.
Learn more about mortgage insurance.
Why is mortgage insurance important?
Mortgage insurance protects the mortgage lender in case the homeowner (borrower) fails to repay the loan. In these cases, the insurance provide would pay lender for their loss.
Mortgage insurance is important to home buyers as well, as it lets people who make low or no down payment qualify for a mortgage.
Private mortgage insurance (PMI)
Home buyers/borrowers who make a down payment of less than 20% will typically be required by the lender to pay monthly PMI on a conventional loan.
Pros:
- 3% down payment option. Conventional loans are available with just a 3% down payment.
- More affordable for good credit scores. People with good credit may benefit from better rates and by qualifying for a conventional loan vs. an FHA loan that requires MIP.
- Removal at 20% equity. If less than a 20% down payment was made, the borrower can ask their lender to cancel or waive PMI once 20% equity has been reached.
- No upfront premium. Unlike MIP, there is no upfront premium required with PMI.
Cons:
- Difficult to qualify for. Conventional loans with less than 20% down require that borrowers have higher credit scores.
- More expensive for lower credit scores. Individuals with lower credit scores will typically pay higher PMI and even a higher interest rate on the loan.
Mortgage insurance premium (MIP)
MIP is charged on FHA loans, which are government insured. When you get a
mortgage loan insured by FHA, you have to pay an up-front mortgage insurance premium (MIP), which can be included in the loan amount. You will also have to pay a monthly insurance premium that is added to the regular mortgage payment. FHA uses the premiums to pay the lender if you default on your mortgage.
Pros:
- 5% down payment option. FHA loans are popular because of the lower down payment requirement.
- More affordable with lower credit. Most lenders require a 580 minimum credit score for borrowers seeking an FHA loan.
- Good for first-time homebuyers. The less stringent down payment and credit score requirements make FHA loans an affordable option for first-time homebuyer
Cons:
- Up front and annual premiums. FHA MIP must be paid up front (it is equal to 1.75% of the loan amount). The borrower will also pay a premium that is added to the monthly mortgage payment.
- Can be difficult to remove. Most lenders require MIP to be in place for the life of the loan. The only way to remove MIP may be to eventually refinance the loan to a conventional loan.
What's the difference between PMI and MIP?
These are the key differences between PMI and MIP:
- Loan type. PMI is charged on conventional loans, while MIP is charged on FHA loans.
- Ability to cancel. PMI can be canceled when 20% equity in the home is reached. To cancel MIP, you may need to refinance to a conventional loan after several years of payments when you have more equity in the home.
- Upfront cost. PMI doesn’t come with an upfront cost, MIP does.
- Annual costs. PMI doesn’t have an annual cost; you will pay the same amount every month until 20% equity is reached. MIP has an annual cost for the life of the loan.
Is PMI or MIP more expensive?
While this is an important question, the answer can be complicated. As we pointed out earlier in this article, there are advantages and disadvantages to both PMI and MIP.
How much a borrower pays for largely depends on the purchase price of the home, how long the home is owned, and whether the borrower makes extra payments over the course of the mortgage to pay down the loan, thereby increasing equity.
A Cu SoCal Mortgage Loan Originator can provide you with mortgage program options so you can choose the loan that works best for your unique situation.
Which is right for me?
Deciding between MIP vs. PMI has more to do with whether an FHA or conventional mortgage makes more sense for your financial situation. Before you choose, speak to several lenders and compare interest rates to see which option best fits your budget and homeownership goals.
Learn more about FHA vs. conventional mortgage loans.
Why savvy consumers choose CU SoCal
For over 60 years CU SoCal has been providing financial services, including mortgages, Home Equity Loans, HELOCs, car loans, personal loans, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
Please give us a call today at 866.287.6225 today to schedule a no-obligation loan consultation with a CU SoCal Member Services specialist.
Get Started on Your Mortage Today!