MIP vs. PMI: Learn the main differences for homebuyers

Mortgage insurance helps make homeownership more accessible for buyers who can't afford a large down payment. This insurance protects the lender in the event the borrower defaults on their loan. If you're shopping for a mortgage, it's essential to consider how this expense will affect your home loan costs.  

If you finance a home with a mortgage backed by the Federal Housing Authority (FHA), you'll pay a mortgage insurance premium (MIP). If you take out a conventional home loan and make less than a 20% down payment, you'll pay private mortgage insurance (PMI).

Find out more about MIP vs PMI. 

What is the difference between PMI and MIP?

Conventional mortgage borrowers who make a down payment of less than 20% are required to pay private mortgage insurance (PMI). This mortgage insurance enables qualified borrowers to purchase a home with a down payment as low as 3%. 

PMI protects the lender in case the borrower falls behind on payments and defaults on the loan. 

The annual PMI premium is paid through monthly installments and added to your monthly mortgage payment. Once a borrower reaches 20% equity in their home, they can request cancellation of PMI. 

FHA loan borrowers are required to pay mortgage insurance premiums (MIP) no matter their down payment amount. This mortgage insurance enables qualified borrowers to purchase a home with a down payment as low as 3.5%.

FHA home loan borrowers pay an upfront mortgage insurance premium (UFMIP) and an annual mortgage insurance premium (MIP). 

FHA loan borrowers who make a 10% down payment can get MIP removed after 11 years. Otherwise, they must pay premiums for the life of the loan, unless they refinance their loan into a non-FHA loan. 

This table provides a quick overview of the primary differences between MIP and PMI: 

What is MIP?

MIP stands for mortgage insurance premiums. It’s a mortgage insurance that you must pay when you have an FHA loan.  

FHA loan borrowers pay MIP expenses in two ways: 

– You'll pay an upfront MIP (UFMIP) at closing. You'll pay 1.75% of the loan amount. For a $260,000 loan, you'll pay $4,550. 

– You'll pay an annual MIP, billed monthly and included in your monthly mortgage payment. Annual premiums range from 0.15% to 0.75%. The amount varies depending on your loan amount, LTV, and loan term. Most borrowers pay 0.50% to 0.55% annually. For a $260,000 loan, that's $1,300 to $1,430 annually. 

You’ll pay MIP regardless of the size of your down payment. However, FHA mortgage insurance removal is possible for some borrowers. If you make at least a 10% down payment, you can eliminate MIP after 11 years of payments. If your down payment is less than 10%, you’ll pay annual MIP for the life of the loan.

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What is PMI?

Private mortgage insurance or PMI is a type of mortgage insurance that only applies to conventional home loans. Borrowers who make a down payment of less than 20% are required to pay PMI. But it can be avoided altogether if you put at least 20% down at closing. 

PMI is an annual expense that is billed monthly and tacked onto your monthly mortgage payment. PMI is a removable mortgage insurance. 

Here’s how to get rid of PMI: 

– Once you reach at least 20% equity in your home, you can contact your lender to request that PMI be removed from your mortgage bill. 

Note: Your lender is required to automatically cancel PMI once your home loan balance reaches 78% of your home’s original value (22% home equity). 

PMI costs vary from one borrower to another. The amount you’ll pay depends on factors such as your credit score, loan size, down payment amount, LTV ratio, DTI ratio, and loan term. 

PMI typically costs between 0.46% and 1.5% of the loan amount annually. 

For a $260,000 loan with 0.70% annual PMI costs, you’d pay $1,820 annually, which adds about $152 a month to each mortgage payment. 

Related: Estimate your mortgage payment using a [mortgage calculator with PMI & taxes}(https://better.com/b/calculators/mortgage-calculator)

MIP vs PMI: pros and cons

It can be helpful to compare PMI and MIP pros and cons to better understand how each differs. Here are some  MIP vs PMI pros and cons to consider: 

Pros of MIP

Some of the benefits of MIP include: 

– Low down payment requirement: For eligible borrowers, FHA loans allow down payments as low as 3.5%. For those with limited savings to make a down payment, MIP may be a worthwhile trade-off. 

– It may be easier to qualify for an FHA loan: FHA loans can be a better fit than conventional loans for some borrowers because of their more flexible eligibility requirements, including lower credit score requirements and lower down payments. Some FHA lenders may also approve borrowers with higher DTI ratios. For some hopeful homebuyers, paying MIP costs can be worthwhile due to these benefits.

– More affordable than PMI for lower-credit borrowers: For borrowers with lower credit scores, MIP may be cheaper than PMI. 

Cons of MIP

Some drawbacks of PMI include: 

– Upfront and annual premiums: Unlike with PMI, you’ll pay upfront and annual MIP premiums. These mortgage insurance costs add to the cost of home ownership. 

– MIP usually cannot be removed: For most borrowers, MIP isn’t removal insurance. If you make a 10% down payment, you can request MIP removal after 11 years. Otherwise, you’ll pay MIP for the life of the loan. The only other option is to refinance into a non-FHA loan. 

– Can be more costly for some borrowers: FHA loan borrowers with lower credit scores and those making smaller down payments may pay more for premiums. 

– Fixed premiums: Some borrowers may be able to negotiate PMI rates with their lender, but the FHA sets the UFMIP and MIP rates, so they’re not negotiable.

Pros of PMI

Some of the benefits of PMI include: 

– Access to homeownership sooner: For eligible borrowers, the minimum down payment for a conventional loan is 3%. You’ll pay PMI until you have 20% home equity. But PMI can enable more people to buy a home without having to save up for a 20% down payment. 

– PMI is temporary: PMI is removable mortgage insurance. Once you reach enough equity in your home, you can have PMI removed. 

– No upfront insurance premiums. Unlike MIP, borrowers only pay annual PMI expenses, which are billed monthly. 

– Can be more affordable than MIP: PMI can be cheaper for some borrowers, especially those with good credit, who make a larger down payment. 

Cons of PMI

Some drawbacks of PMI include: 

– Stricter qualification requirements: PMI applies to conventional loans, which typically have stricter credit score and DIT ratio qualification requirements. 

– Additional mortgage costs: PMI is added to your monthly mortgage payment, increasing your monthly housing costs. 

– Protects the lender only: Borrowers pay PMI, but this insurance protects the lender only. 

– More costly for lower-credit borrowers: Those with lower credit scores will pay higher PMI costs. 

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Which is right for you? MIP or PMI

MIP vs PMI — which is right for you? It all depends on your ideal mortgage loan. MIP applies to FHA loans and PMI applies to conventional loans, so you’ll need to figure out which mortgage you'll use to finance your home purchase.

As you compare mortgage options, consider your financial situation and long-term goals. Here are a few pointers to help you choose the best type of mortgage for your situation: 

– Conventional loan: This type of mortgage is ideal for homebuyers with good credit who can make a larger down payment. If you’re making a down payment of less than 20%, you’ll pay PMI. But once you reach 20% equity in your home, you can remove PMI. 

– FHA loan: This type of mortgage is ideal for homebuyers with lower credit scores and limited savings, allowing them to make a small down payment. MIP is a long-term expense, but an FHA loan can make homeownership more accessible for more people. 

This FHA vs. conventional loans guide provides more insight into the differences between these two mortgage types. Ready to compare home loan rates? Check out today’s mortgage rates. 

Better is an online lender that offers online pre-approval and multiple mortgage options through their digital platform. Find out how to get a mortgage pre-approval online. 

MIP vs PMI FAQ

Here are some answers to commonly asked questions related to FHA PMI vs conventional PMI: 

What are the main differences between PMI and MIP?

The main differences between PMI and MIP are the types of loans they apply to, how the mortgage insurance is paid, and their rules for cancellation. 

Conventional mortgage borrowers who make less than a 20% down payment pay PMI. Annual premiums are billed monthly and added to your mortgage payment. You can have PMI removed once you reach 20% equity. 

FHA home loan borrowers must pay MIP, regardless of the down payment amount. You'll pay upfront and annual MIP costs (billed monthly and added to your mortgage payment). Most borrowers pay MIP for the life of the loan, unless they refinance. Borrowers who make a 10% down payment can have MIP removed after 11 years. 

How can homeowners remove PMI?

Once homeowners reach 20% equity in their homes, they can request PMI removal. 

How long do borrowers typically pay mortgage insurance?

Most FHA loan borrowers pay MIP for the life of the loan, or until they refinance. Conventional loan borrowers pay PMI until they reach 20% equity in their home, or they avoid it by making a 20% down payment at closing. 

MIP vs PMI: There are pros and cons to both mortgage insurance

Mortgage insurance is an expense that all FHA home loan borrowers and some conventional loan borrowers pay. MIP and PMI have pros and cons.

If you’re looking to finance a home, you should consider your financial situation and long-term goals to determine whether an FHA mortgage or a conventional mortgage is the best fit for you.

You should also review how each mortgage insurance program works to know what to expect.  

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