Mortgage Insurance: Understanding the Difference between PMI and MIP

January 16, 2020
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Donny Raw
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Most home loans without at least 20% down payment require mortgage insurance. While it is usually paid by the homeowner, it doesn’t provide them any coverage. Put simply, the role of mortgage insurance is to protect the person who purchases the loan on a secondary market—in case the loan goes on default. Like other loans, there are different types of insurance, but the most common are Mortgage Insurance Premiums (or MIP) and Private Mortgage Insurance (or PMI).

What’s the difference between MIP and PMI?

Here are the main differences between these two types of mortgage insurance:

While PMI applies to traditional loans with conventional down payments, MIP is often applied to government-backed FHA loans.
As you can guess, PMI exists to protect investors for all kinds of home loans while MIP can only protect government-backed loans.
MIP tends to protect the lenders irrespective of the amount of down payment. And when a borrower pays 10 percent or more as down payment, the premium can be cancelled after 11 years. On the other hand, MIP entails an upfront payment plus a rate of 1.75% as well as an annual 0.85% premium. Loan terms of 15 years or less tend to attract lower annual premiums.
PMI is more flexible as you can pay it upfront at closing or pay for it on a monthly basis. Additionally, most PMI rates are dependent on the loan size and the loan-to-value ratio with most rates ranging between 0.2% and 2% of the loan amount.
As hinted, you can cancel PMI when your loan is scheduled to hit the 78% threshold of the original value of your home. It can also be canceled (upon your request) when your home equity reaches 20% of its purchase price or its current appraised rate. Most lenders will approve such kind of PMI cancellations if the borrower has enough equity and great payment history. Lastly, it is possible to terminate this mortgage insurance option if you reach the midpoint of the set amortization period (which can be 15 years for a 30-year loan). The only way to terminate MIP is by refinancing it fully. By meeting the set improved down payment and all the credit requirements, you reduce the risk to your lender and MIP is no longer necessary.

Which Option Is More Expensive?

Since several factors affect the costs of MIP and PMI and the factors tend to vary on an individual basis, the best way to estimate the cost of MIP versus PMI is to consult a mortgage professional. Most mortgage insurance advisors are always ready to answer any question about MIP and PMI as well as home loans that go with them.

Insurance is known to replace the unknown with security for investors. For homeowners and homebuyers, on the other hand, the best bet is to get a mortgage that meets your needs and financial goals. Hopefully, the above tips have shed some light on the basics of what MIP and PIM entail.