What Are MIP and PMI?
Private Mortgage Insurance (PMI) is a type of insurance typically required when a borrower makes a down payment of less than 20% of the home’s purchase price. The purpose of PMI is to protect the lender in the event that the borrower defaults on the loan. PMI payments are usually included in monthly mortgage payments. Once the borrower has built up enough equity in the home, they can cancel the PMI.
Mortgage Insurance Premium (MIP) is a type of insurance required on Federal Housing Administration (FHA) loans. MIP is required for the life of the loan, unlike PMI, which can be cancelled once the borrower reaches a certain equity level.
What’s the Difference Between PMI and MIP?
The main difference is the type of loan they’re associated with.
PMI is required on conventional loans — loans backed by banks, such as:
- ARM loans
- HomeReady
- Non-qualified mortgages
- Portfolio loans
- Fixed-rate mortgages
- Interest-only mortgages
- Conventional 97
MIP is required on unconventional loans — loans backed by the government, such as:
- FHA Loan
- USDA Loan
Another difference is that PMI can be cancelled once the borrower reaches a certain equity level, while MIP cannot.
How Much Equity Do You Need to Cancel PMI?
Typically, lenders require at least 20% equity in the home before cancelling PMI. The Homeowners Protection Act of 1998 (HPA) provides rights to homeowners to request cancellation once they reach 22% equity based on the original value, or once they reach a 78% loan-to-value ratio.
For example, if you take out a $250,000 mortgage with a 10% down payment ($25,000), you’d be required to have PMI. Once you’ve paid down enough of the loan and the home’s value has increased sufficiently, you can request cancellation.
Can You Cancel MIP?
No. Unlike PMI, MIP is required for the life of the FHA loan. Even if your home increases in value and you’ve built up significant equity, you’ll still pay MIP. The only way to eliminate it is to refinance into a conventional loan where PMI applies instead — and can eventually be cancelled.
Understanding MIP and PMI is essential when choosing between mortgage loan types as a first-time homebuyer. These insurance costs directly affect your monthly expenses as a property owner, so factor them into your numbers before you buy your first rental property.
