Mortgage Insurance Premium vs. Private Mortgage Insurance
An Overview of Private Mortgage Insurance vs. Mortgage Insurance Premium
If your down payment is less than 20% of the home’s price, you will be required to pay a mortgage insurance premium (MIP) if your loan is backed by the Federal Housing Authority or private mortgage insurance (PMI) if you have a conventional loan. In either scenario, the insurance shields lenders in the event that you don’t make loan payments.
Premium for Mortgage Insurance
FHA-insured mortgage loans provide borrowers with more lenient qualifying requirements, such as a 3.5% down payment instead of the customary 20%. The FHA protects private lenders that offer FHA-backed loans from default risk.
However, if borrowers put down less than 20% of the total cost, they will have to pay a mortgage insurance fee (MIP). Although the pricing structure for the borrower is different from PMI’s, this premium is comparable to PMI in that it is an insurance policy that safeguards the lender. At the loan closing, you will also be required to pay an upfront charge.
Premium for Upfront Mortgage Insurance (UFMIP)
Additionally, 1.75% of the loan principal paid at closing is assessed as the “upfront” mortgage insurance payment (UFMIP) by the FHA.
Before MIP may be discontinued for loan periods longer than 15 years, FHA requires monthly MIP payments for a full five years for loans with FHA case numbers assigned prior to June 3, 2013. Only when the loan debt equals 78% of the home’s initial purchase price—the amount listed on your mortgage documents—can the premium be canceled.
However, new regulations are in effect if your FHA loan was originated after June 2013. You will pay MIP for 11 years if your initial LTV was 90% or below. You will pay MIP throughout the duration of the loan if your LTV is more than 90%.
How Can Private Mortgage Insurance (PMI) Be Removed?
You can ask your mortgage lender to terminate PMI after you own 20% of your house. However, when you have paid down 22% of your loan total, your lender must automatically terminate PMI. “Private Mortgage Insurance (PMI).” Texas Department of Insurance.
How Can the Mortgage Insurance Premium (MIP) Be Refunded?
You are required to pay the MIP throughout the duration of the loan if your down payment was less than 10%. The MIP ends in 11 years if you made a down payment of 10% or more. Otherwise, you can remove the MIP before it expires by refinancing the FHA loan into a conventional mortgage or paying off the loan.
The Bottom Line
The mortgage lender demands insurance to safeguard the property in the event of a default if you purchase a house with a down payment of less than 20%. The lender is protected by private mortgage insurance (PMI), which the borrower is required to pay each month as a percentage of the loan principal. In addition to an upfront payment equal to 1.75% of the loan principal at closing, you will be required to pay a mortgage insurance premium (MIP) either yearly or in monthly payments if you purchase a property guaranteed by the Federal Housing Administration (FHA).