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If you’re buying a home and have a down payment of less than 20% of the purchase price, you may need to pay for private mortgage insurance (PMI) or a mortgage insurance premium (MIP). This insurance protects your lender in the event that you default on your loan. It also presents an additional cost for you — a charge you’ll have to keep paying for part or all of the life of the loan. But it can be worthwhile since, for many aspiring homeowners, it can unlock a chance at homeownership.

Private mortgage insurance may be required for conventional home loans — those not backed by a government program. A mortgage insurance premium is a little different and is always a part of an FHA-insured loan, at least for a number of years. Both are intended to protect lenders against losses if borrowers default on their home loans. Here’s a guide to how they work, how they differ, how much they cost, and when you can possibly escape their hold on you.

What Is Private Mortgage Insurance?

PMI is a type of coverage typically required by lenders on conventional conforming loans. A lender might stipulate PMI when you make a down payment that is less than 20% of an accepted offer or asking price.

Most conventional mortgages are “conforming,” which means they meet the requirements to be sold to Fannie Mae or Freddie Mac. It’s best to consult the lender when you apply for a loan about whether you will have to pay for PMI.

Although PMI adds a cost, it can allow you to qualify for a loan that you otherwise might not get. And it can help you to buy a house without putting 20% down.

How Much Does PMI Cost?

The price of PMI varies, but often is 0.5% to 1% of the total loan amount annually. The cost depends on the type of mortgage you get, your credit score, the loan-to-value (LTV) ratio, and more. It also depends on the amount of PMI that your loan program or lender requires. PMI could run as high as 6% of the amount you borrow.

Usually, homeowners required to pay PMI do so monthly, rather than annually, and it’s included in their mortgage payments. A few may opt for lender-paid mortgage insurance (LMPI), an option where the lender for the home loan pays the cost of mortgage insurance. For that convenience, however, a homebuyer will usually pay a slightly higher interest rate, and more over the life of the loan.

Despite the cost, PMI may be more economical than an FHA loan if you’re a borrower with a FICO® score of around 740 or above who can put 3.5% down.

When Can You Stop Paying PMI?

Buying a home may require you to pay PMI, but there are ways to get to the point where you can stop paying it.

First, there is a legal end to PMI. Under the Homeowners Protection Act, also known as the PMI Cancellation Act, your lender is required to cancel PMI automatically once your mortgage balance is at 78% of the home’s original value. That generally means either the contract sales price or the appraised value of your home at the time you purchased it, whichever is lower (or, if you have refinanced, the appraised value at the time you did so). Which figure is used for the original value can vary by state.

Second, you can have your home reappraised, which will likely result in a new value, and ask your servicer to cancel PMI if you have built equity of 20% or more of the current value. Owners of homes that have appreciated, either over time or thanks to home improvements, may benefit from this. You may need to be proactive with your lender and meet specific eligibility requirements to help make that happen.

Third, you may be able to refinance your mortgage. If you have at least 20% equity, you can possibly qualify for a conventional loan that won’t require PMI.
Finally, the Consumer Financial Protection Bureau notes that if you have stayed current on your payments and reached the halfway point of the loan’s schedule, PMI can be canceled, even if your mortgage balance hasn’t yet reached 78% of the home’s original value.

💡Quick Tip: A major home purchase may mean a jumbo loan, but it doesn’t have to mean a jumbo down payment. Apply for a jumbo mortgage with SoFi, and you could put as little as 10% down.

What Is a Mortgage Insurance Premium?

If they’re securing a home loan backed by the Federal Housing Administration, borrowers pay for a different type of coverage, known as a Mortgage Insurance Premium or MIP. When it comes to FHA loans, MIP applies no matter what your loan term or down payment amount.

A key reason people choose FHA loans is the ability to buy a home even with a low down payment — these loans allow you to put down as little as 3.5%. But keep in mind that even with that affordable down payment, this type of loan bears costs and, as a borrower, you’ll want to understand them.

MIP runs for 11 years or the loan’s full term, depending on the borrower’s down payment, the balance owed, and LTV. As the homebuyer, you also pay a one-time upfront MIP premium of 1.75% of the base loan amount, which can be rolled into the loan. On top of that, you’ll have an annual premium that is divided by 12 to determine your payment, which is added to your monthly mortgage payment.

Recommended: Different Types of Mortgage Loans, Explained

How Much MIP Will You Pay on an FHA Loan?

Like a mortgage interest rate, MIP fluctuates. The ongoing annual MIP is calculated with a rate that’s currently around 0.15% to 0.75%. It is divided by 12 and added to your monthly mortgage payment. What you’ll pay in the end depends on your loan-to-value (LTV) ratio — also known as the price minus your down payment — and the length of the loan.

If you take out an FHA loan for the common term of 30 years, or any length of time greater than 15 years, your monthly MIP costs will be determined by calculating the loan’s annual average outstanding balance, based on what banks refer to as its amortization schedule. This figure is then multiplied by the annual MIP rate and divided by 12 to determine a monthly payment.

That is the amount that will be added to your principal payment on your home loan, along with charges like escrow amounts for property taxes and the monthly cost of your homeowner’s insurance.

Here’s an example: Let’s say you borrow less than or equal to $726,200 to buy your home, and make a down payment of 5% or less. You’ll pay an annual MIP of 0.50% on your loan. On a home loan of $300,000, you’ll pay MIP of about $1,500 per year, or $125 per month.

The following chart details approximate monthly payments based on different loan and down payment amounts. Remember, LTV is the total home price, or 100%, minus the percentage you take care of in your down payment.

Some homeowners can pay off their loans more quickly. By choosing a shorter term, such as 15 years, you could take advantage of a lower MIP.

Take the 15-year option, which gives you a better deal with a lower rate. If you were to borrow less than or equal to $726,200 and put down 10% or less as a down payment, you’d pay an annual MIP of just 0.15%. On a $300,000 home loan, that’s more like $450 a year, or $37.50 a month.

This all may seem complicated, but many people find that the flexibility of an FHA loan, if you can secure one, makes it worth paying the MIP.

Thinking about buying a fixer-upper and making it beautiful and functional again? FHA offers the FHA 203(k) home loan for that — something that few lenders do, especially if the home isn’t in good enough shape to be lived in, but it may be worth investigating.

Recommended: FHA Mortgage Loan Calculator

Can You Get Rid of MIP?

Possibly. If you took out an FHA loan before June of 2013, you may be able to cancel your MIP. You would need to now have 22% equity in your home — meaning your loan balance has reached 78% of the purchase price noted on your mortgage paperwork — and have made all payments on time. (FHA lenders do not automatically cancel your MIP once you reach that threshold. You’ll need to ask for it to be stopped.)

If your FHA loan originated more recently than June 2013, however, different rules govern it. If your down payment totals less than 10%, you must pay the MIP for the life of the loan. Made a down payment of 10% or more? MIP expires in 11 years.
Other ways to unburden yourself of MIP include paying off the FHA loan or refinancing it into a conventional loan with a private lender, which will give MIP the heave-ho.

What About Refinancing?

If you have a mortgage that includes PMI or MIP and your property value has increased significantly, the option of refinancing is one to think about.

Some borrowers may find that at a certain point they can qualify for a conventional home loan without mortgage insurance.

Refinancing holds appeal because of the possibility of locking in a better rate and reducing your monthly payment. Equity-rich homeowners sometimes like the option of a cash-out refinance.

But as with your original mortgage, you’ll face closing costs if you refinance.

What about a “no-closing-cost refinance” you might see advertised? You’ll either add the closing costs to the principal or get an increased interest rate.

The Takeaway

Glass half-full: Private mortgage insurance and mortgage insurance premium open the door to homeownership to many who otherwise could not buy a property. Glass half-empty: PMI and MIP can really add up.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

FAQ

Is it a better option to put down 20% or to pay PMI?

It’s great to make a down payment of 20% and avoid private mortgage insurance (PMI), but not everyone can afford to do it. It can be particularly hard for first-time homebuyers, who often don’t have income from the sale of another residence to fund their next home purchase. Use a home affordability calculator to look carefully at monthly mortgage payment amounts for various home prices and interest rates. Put down what you can afford and try not to compromise your ability to cover other bills, including the mortgage payment itself.

How long will I pay PMI?

If you’re paying private mortgage insurance, you’ll need to continue until you’ve built up 20% equity in your home (based on the original sale price). At this point, you can request in writing that your loan servicer cancel PMI as long as you’re current on your payments.

How are FHA MIP rates determined?

The FHA reevaluates and updates MIP rates periodically. Changes are based on the condition of its Mutual Mortgage Insurance Fund, and current housing and economic conditions.

Can I cancel my FHA MIP once I’ve reached a certain equity level?

No. Unlike the private mortgage insurance on a conventional loan, which goes away after a homeowner reaches 20% equity, FHA MIPs cannot be canceled.

Are MIP payments tax-deductible?

Unfortunately, no. The Further Consolidated Appropriations Act of 2020 allowed qualified taxpayers to take a tax deduction for MIP and PMI costs for the tax years 2018 through 2021, but the deduction has expired and is no longer available.

About the author

Ashley Kilroy

Ashley Kilroy is a seasoned personal finance writer with 15 years of experience simplifying complex concepts for individuals seeking financial security. Her expertise has shined through in well-known publications like Rolling Stone, Forbes, SmartAsset, and Money Talks News. Read full bio.

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SOHL-Q225-186

UCITS, or Undertakings for Collective Investment in Transferable Securities, refers to a set of guidelines that allow pooled securities, similar to mutual funds, to be traded across borders within the European Union.

As such, UCITS is essentially a framework or directive that governs the composition and trading of UCITS funds.

UCITS funds are registered in individual EU countries and must comply with European Commission rules. Investors in the U.S. may also access these funds via authorized brokers. UCITS may be available in other regions, like Asia, as well.

What Is a UCITS Fund?

UCITS funds are a type of mutual fund that complies with European Union regulations. These securities can be traded across the borders of EU member states.

The EU launched UCITS for two primary reasons:

1.    To structure a type of security under the EU umbrella that allowed for the cross-border sale of mutual funds throughout the EU, and across other markets.

2.    To better regulate investment asset transactions among all EU member countries, giving investors inside and outside of the EU access to more tightly regulated investment funds.

Fundamentally, UCITS rules give EU regulators a powerful tool to centralize key financial services issues like types of investments allowed, asset liquidity, investment disclosures, and investor safeguards. By rolling the new rules and regulations into UCITS, EU regulators sought to make efficient and secure investment funds available to a broad swath of investors.

For investors, UCITS funds offer flexibility and security. Not only are the funds widely viewed as safe and secure owing to the level of regulation, but UCITS funds offer a diversified fund option to investors who might otherwise have to depend on single public companies for the bulk of their investment portfolios.


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A Brief History of UCITS

The genesis of UCITS funds dates back to the mid-1980’s, with the rollout of the European Directive legislation, which set a new blueprint for financial markets across the continent. The new law introduced UCITS funds on an incremental basis and has been used as a way to regulate financial markets with regular updates and revisions over the past three decades.

In 2002, the EU issued a pair of new directives related to mutual fund sales — Directives 2001/107/EC and 2001/108/EC, which expanded the market for UCITS across the EU and loosened regulations on the sale of index funds in the region.

The fund initiative accelerated in 2009 and 2010, when the Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 clarified the use of UCITS in European investment markets, especially in coordination of all laws, regulations, and administrative oversight. The next year, the European Union reclassified UCITS w as investment funds regulated under Part 1 of the Law of 17 December 2010.

In recent years, “Alt UCITS” or alternative UCITS funds have grown in popularity, along with other types of alternative investments.

How Does a UCIT Fund Work?

Structurally, UCITS are built like mutual funds, with many of the same features, regulatory requirements, and marketing models.

Individual and institutional investors, who form a collective group of unit holders, put their money into a UCIT, which, in turn, owns investment securities (mostly stocks and bonds) and cash. For investors, the primary goal is to invest their money into the fund to capitalize on specific market conditions that favor the stocks or bonds that form the UCITS.

UCITS funds may provide one way for American investors to get more international diversification within their portfolios.

A professional money manager, or group of managers, run the fund, and they are singularly responsible for choosing the securities that make up the fund. The UCITS investor understands this agreement before investing in the fund, thus allowing the fund managers to choose investments on their behalf.

An investor may leave the fund at any point in time, and do so by liquidating their shares of the fund on the open market. American investors should know that the Internal Revenue Service may classify UCITS as passive foreign investment companies, which could trigger more onerous tax treatments, especially when compared to domestic mutual funds.


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UCITS Rules and Regulations

UCITS do have some firm regulatory and operational requirements to abide by in the European Union, as follows:

•   The fund and its management team are usually based on a tax-neutral EU country (Ireland would be a good example).

•   A UCITS fund operates under the laws mandated by the member state of its headquarters. After the fund is licensed in the EU state of origin, it can then be marketed to other EU states, and to investors around the world. The fund must provide proper legal notification to the state or nation where it wants to do business before being allowed to market the fund to investors.

•   A UCITS fund must provide proper notice to investors in the form of a Key Investor Information Document, usually located on the fund’s website. The fund must also be approved.

•   A UCITS fund must also provide a fund prospectus to investors (also normally found on the fund’s web site) and must file both annual and semiannual reports.

•   Any time a UCITS company issues, sells, or redeems fund shares, it must make pricing notification available to investors.

The Takeaway

Undertakings for Collective Investment in Transferable Securities (UCITS) is a category of investment funds primarily available in the EU, but investors in the U.S. may access these funds through authorized brokers.

UCITS may be an interesting type of investment for U.S. investors looking to diversify their portfolios. As with any investment, investors must conduct thorough due diligence on a UCITS security, which should include a review of fund holdings, past performance, management stability, fees, and tax consequences.

FAQ

What is UCITS in simple terms?

UCITS is a set of guidelines governing a type of mutual fund in the EU. It stands for: “undertaking for collective investment in transferable securities.” This means it’s a type of pooled investment, similar to a U.S. mutual fund, that invests in securities like stocks, bonds, short-term government bonds, and cash.

What is a non-UCITS fund?

A non-UCITS fund does not comply with UCITS guidelines. For example, a non-UCITS fund might not be open-ended or it might be illiquid — two primary UCITS requirements.

What are the disadvantages of UCITS?

UCITS funds may have higher costs, owing to the regulatory requirements governing securities in the EU. Also, because the UCITS standards can be restrictive, these funds may not be able to take advantage of certain market conditions. UCITS funds can also have higher tax consequences for U.S. investors.

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