Elias Zoleta
Last Updated on: 29th January 2023, 10:33 am
What is Private Mortgage Insurance (PIM) in comparison to Mortgage Insurance Premiums (MIP)?
Private Mortgage Insurance (PMI) is a type of insurance that is 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 is usually included in their monthly mortgage payments. Once the borrower has built up enough equity in the home, they will be able to cancel the PMI.
Mortgage Insurance Premium (MIP) is a type of insurance required on Federal Housing Administration (FHA) loans. The purpose of MIP is to protect the lender in case the borrower defaults on the loan. Borrowers pay for MIP, which is usually included in their monthly mortgage payments. 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 between Private Mortgage Insurance (PMI) and Mortgage Insurance Premium (MIP) is the type of loan they are associated with. PMI is typically required on conventional loans, loans that are typically backed by banks such as:
- ARM loans
- HomeReady
- Non-qualified Mortgages
- Portfolio Loans
- Fixed Rate Mortgages
- Interest Only Mortgages
- Conventional 97
MIP, on the other hand, is required on unconventional loans, loans that are backed by the government such as:
- FHA Loan
- USDA Loan
Another difference is the way of payment, PMI is usually included in the monthly mortgage payments, while MIP is required for the life of the loan. Furthermore, PMI can be cancelled once the borrower reaches a certain equity level, while MIP cannot.
How much equity do you need before you can cancel a PMI?
The amount of equity required before you can cancel a Private Mortgage Insurance (PMI) can vary depending on the lender and the type of loan. Typically, lenders require that a borrower has at least 20% equity in the home before they will cancel the PMI. However, some lenders may require more equity, while others may cancel PMI at a lower equity level. It’s also worth noting that, the Homeowners Protection Act of 1998 (HPA) provides certain rights to homeowners to request the cancellation of PMI, if they meet the requirement such as:
- Once the borrower reaches 22% equity based on the original value of the home
- Once the borrower reaches 78% loan-to-value ratio based on the original value of the home, whichever comes first. It’s also important to check with the lender or servicer of the loan to understand the specific requirements and guidelines for canceling PMI.
For example, if a borrower takes out a $250,000 mortgage loan to purchase a home and makes a down payment of 10% ($25,000), they would be required to have PMI. Once the borrower has paid off enough of the loan and the value of the home has increased, they may be able to cancel the PMI.
For the Homeowners Protection Act of 1998 (HPA) requirement:
- If the home’s value increases to $300,000 and the borrower has paid off enough of the loan to have 22% equity, the lender would be required to cancel the PMI.
- If the borrower has paid down enough of the loan so that they owe $195,000 on a $250,000 home, the lender would be required to cancel the PMI.
It’s important to note that the lender will typically require a new appraisal of the property to determine the current value and that it may also require some other conditions to be met such as being current on payments or providing proof of income. It’s also important to check with the lender or servicer of the loan to understand the specific requirements and guidelines for canceling PMI.
Example for MIP
Let’s say a borrower takes out an FHA loan to purchase a home and makes a down payment of 3.5% of the purchase price, they would be required to have Mortgage Insurance Premium (MIP). Unlike PMI, MIP is required for the life of the loan and cannot be cancelled.
For example, if a borrower takes out a $250,000 FHA loan with a 3.5% down payment ($8,750), they would be required to pay MIP as part of their monthly mortgage payments. The MIP rate would vary based on the loan term and the amount of the down payment. Even if the home increases in value and the borrower has built up a significant amount of equity, they would still be required to pay MIP for the life of the loan.
It’s important to note that the MIP rate for FHA loans has been adjusted multiple times over the years and it may change in the future. It’s also important to check with the lender or servicer of the loan to understand the specific requirements and guidelines for the payment of MIP.
Related Post: Types of Mortgage Loans for First-time Homebuyers
