We live in a world of acronyms, from promising someone to complete a project ASAP to deciding to handle something by DIY—and that doesn’t address the ones we use when we’re texting.
Mortgage lending has its own acronyms. Here, we’ll tackle the differences between private mortgage insurance, known as PMI, and mortgage insurance premium, known as MIP—including the circumstances when each would need to be paid and tips to avoid paying either.
PMI may be required with a conventional conforming mortgage loan, which is a home loan not insured or guaranteed by the federal government. PMI is a possibility when your mortgage loan is obtained through a private lender, such as a bank or credit union, or other mortgage company.
In contrast, one type of government-insured loan that requires mortgage insurance is the FHA loan, which is issued by the Federal Housing Administration. Because it’s a government insured loan, mortgage insurance is a requirement.
With FHA, the mortgage insurance premium (MIP) typically runs for the life of the loan. There are two parts to this type of government insurance, an upfront annual premium which can be rolled back into the loan amount and a monthly premium which is part of the ongoing monthly mortgage payment.
Note that neither are homeowner’s insurance policies that are intended to protect you and your home. That’s a separate policy you’ll need to obtain.
What Is Private Mortgage Insurance?
Private mortgage insurance (PMI) is typically required when you’ve put less than 20% down when buying a home and are getting your mortgage via a conventional loan. Jumbo loans sometimes do not require PMI.
This insurance protects the lender because loans that have less than 20% of a down payment are considered somewhat riskier to the lender. PMI allows them to insure their investment in your property in case you default on the loan.
PMI costs can run from an annual amount of 0.5% to 2.25% of the total loan amount, with the premium amount depending upon the type of mortgage you get, LTV or percent of your down payment, your credit score and more. It also depends upon the amount of PMI that’s required by your loan program or lender.
Usually, customers choose to pay PMI monthly and it is included in your monthly mortgage payments but, if you prefer, you could buy out the full life of loan premium when closing on your home. Sometimes this can make sense if you have seller credit to cover some or all the cost of the one time PMI.
Although paying PMI adds costs to getting your mortgage and can increase your mortgage payments, it can allow you to qualify for a loan that, otherwise, you might not.
It can help you to buy your house of choice, even without putting 20 percent down. In fact, more than 50% of first time home buyers pay PMI.
Annually, your lender must also send you information on how PMI can be cancelled once you meet the eligibility criteria.
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. For this purpose, “original value” 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 refinanced). Which figure is utilized for original value can vary by state.
If your home has increased in value or you have made substantial improvements to the property since purchase, you may still be able to have your PMI cancelled before it would have ended with the regularly scheduled payments, although you may need to be proactive with your lender and meet certain eligibility requirements to help make that happen.
According to the Consumer Financial Protection Bureau , if you want to request to have your PMI cancelled, you must:
• make your request in writing
• have a good payment history
• be current on your mortgage payments
Your lender may also require a couple other things, including that you:
• certify there aren’t other liens on the home, such as a second mortgage
• provide evidence, such as an appraisal, to show that your home’s value has not declined from its original value
This governmental agency notes another way in which PMI must be cancelled: If you’re current on your payments and you’ve already reached the halfway point of the loan’s schedule—no more PMI.
So, if you have a 30-year loan and you’re now at year 15, and you’re current on your mortgage payments, PMI must be cancelled, even if you don’t yet have 78% of the equity in your home.
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What is Mortgage Insurance Premium?
A borrower will pay Mortgage insurance premium (MIP) if you’re securing an FHA loan. Just like with PMI, this protects the lender in case of default. Unlike PMI, where lenders have flexibility in charging for the insurance, it is mandatory that borrowers must pay MIP.
Sometimes MIP can be cancelled. When this can happen depends upon how long you have been paying on the loan, how much you’ve put down, when the loan originated, and more.
To find out when you can drop MIP, you’ll need to contact your mortgage company (not the FHA) and ask about their requirements. This usually involves having significant equity. Qualifications differ for people whose FHA case number is before June 3, 2013 versus those whose case number was assigned on that date or afterwards.
A key reason that people choose FHA loans is because of the low down payments that can be made. Plus, if your heart pounds faster in excitement when you think about buying a fixer-upper home and making it beautiful and functional again, FHA offers a loan program for that—something that many lenders won’t do, especially if the home currently isn’t in good enough shape to be lived in. This program is the FHA 203K home loan.
Before this loan program was created, borrowers who wanted to buy a home and also get the fix-up funds often needed to take out multiple loans, while the FHA 203K home loan is a single source of funding. Even borrowers with a less than perfect credit score may be able to get this type of loan.
With an FHA 203K loan, the interest rate may be slightly higher than other mortgage rates and, because this loan can require more coordination, it makes sense to choose contractors to repair and upgrade the home who are familiar with the program’s requirements.
Let’s say that the home you’re purchasing needs two bathrooms completely redone. The loan amount will take into account the estimated costs for these upgrades, as well as the added value to the home. It’s worth noting that FHA 203k loans will cover most structural repairs, home additions, and so forth, but not luxury items, such as a pool.
SoFi has a home improvement cost calculator to check out.
PMI versus MIP (or Neither!)
At a high level, these two types of insurance premiums are similar, each protecting the lender in case of borrower default, but from there have varied costs and requirements.
Having said that, you may want to explore the programs in more depth to find out if one or the other is right for you.
If you are looking for ways to avoid paying either of these insurances, you may choose to pay for your home in cash, or in some cases, put at least 20% down. If neither of these options seem practical, then you can create a plan where you’ll pay down your home loan balance more quickly to shorten the amount of time you’ll pay either insurance.
In addition, there are private lenders, like SoFi, where you can avoid being charged PMI on your Jumbo loan, with as little as 10% down.
If you currently have a mortgage that includes PMI and your property value has increased significantly, one option to consider is refinancing. Some borrowers may find that they are now able to qualify for a mortgage without PMI.
There are pros and cons to refinancing your mortgage, so review your personal situation. If you decide it is an option for you, it takes just a few minutes to get a quote from SoFi to see what your new mortgage options could look like. SoFi’s mortgage loan officers can assist you throughout the loan process. If you’re already a SoFi member, you may also benefit from additional member savings.
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