Difference between PMI and MIP?

Private mortgage insurance graphicIf you're thinking about buying a house, you've probably heard the phrase "PMI" (private mortgage insurance). So, what exactly is it? Private mortgage insurance (PMI) is insurance that mortgage lenders request from home purchasers when the down payment on a "conventional" mortgage is less than 20%. Needless to say, many potential homebuyers are reluctant or unable to come up with a 20% down payment.
As a result, the lender will accept your down payment and seek a private mortgage insurance firm to "guarantee" the gap between your down payment and the necessary 20%.

If your down payment is 5%, for example, the private mortgage insurance company will reimburse the lender the "missing" 15% down payment if you default on the mortgage. For the default guarantee, a "PMI" charge is paid to the private mortgage insurance firm. Private mortgage insurance firms provide a variety of payment options, including monthly, one-time upfront payments, and a hybrid of the single premium and monthly plans. Another common choice is lender-paid PMI.
In return for a somewhat higher interest rate, several mortgage lenders will pay the PMI fee on the borrower's behalf.

How much is PMI insurance?

The down payment, property location, credit score, mortgage length (15 year mortgages pay less), and a few other variables all influence the private insurance cost.

Private mortgage insurance is more expensive in high-default states.

Mortgage insurance prices differ across private mortgage insurance providers, and PMI rates may fluctuate throughout the year. There are four common methods for paying private mortgage insurance.
The examples below show how much PMI costs under various PMI programs.

1. Monthly plan (also known as borrower paid MI)

The monthly PMI payment plan is the most common, most likely because it is the simplest computation for the loan officer.
The following examples assume a 30-year loan with a "fixed" interest rate.

Here's an example of a monthly PMI premium.
Take note of how the monthly premium lowers as the down payment becomes larger.

Down Payment Percentage Loan Amount Credit Score Premium Factor MONTHLY COST
3% 194,000 700 0.99% 160.05
5% 190,000 700 0.78% 123.50
10% 180,000 700 0.55% 82.50
15% 170,000 700 0.25% 35.42
The mortgage insurance premium component rises as one's credit score falls and falls as one's credit score rises.

2. Borrower paid single premium

The one-time premium PMI is a one-time payment made upon settlement (or financed with the loan). There is no additional payment to the mortgage or a private mortgage insurance provider. The single premium is often combined with seller-paid closing expenses. Home sellers may pay a portion of the buyer's closing expenses, which includes the PMI premium. Read more about seller paid closing-costs

The single premium is available in both refundable and non-refundable forms.
The refundable option implies that if the loan is paid off early, the borrower will get a portion of the single payment back. If the loan is paid off early, the non-refundable option does not return any unearned premium. The single non-refundable premium is less costly.

Down Payment Percentage Loan Amount Credit Score Premium Factor One time payment
3% 194,000 700 3.18% 6,169.20
5% 190,000 700 2.52% 4,788.00
10% 180,000 700 1.75% 3,150.00
15% 170,000 700 0.71% 1,207.00

3. Split premium

The split premium option combines the single premium with the monthly premium.
Borrowers may pay a portion of the mortgage insurance at closing and a lower monthly payment. The smaller the monthly cost, the greater the upfront proportion.
The monthly cost is also affected by the credit score.

Down Payment Percentage Loan Amount Credit Score Upfront Premium Factor Monthly premium factor One time payment Monthly payment
3% 194,000 700 0.50% 1.06% 970.00 171.37
5% 190,000 700 0.50% 0.76% 950.00 120.33
10% 180,000 700 0.50% 0.47% 900.00 70.50
15% 170,000 700 0.50% 0.10% 850.00 14.17

4. Lender paid mortgage insurance (LPMI)

Lender paid mortgage insurance, or LPMI, is the fourth alternative.
The lender pays a single fee to the mortgage insurance provider and charges the borrower a higher interest rate with this option.
This payment method should be weighed against the monthly payment to see whether it is preferable. There is an option between a higher interest rate and a monthly mortgage insurance expense that will decrease in the future.

  Frequently Asked Questions About PMI & MIP

Q. Can I refinance to remove PMI?
A. Refinancing your mortgage can be a good way to eliminate the PMI, provided that the new loan amount is 80% or less than the home's market value

Q. How Can I Get Rid of PMI?
A. Under The Homeowner's Protection Act, you have the right to request termination of PMI premium when you reduce your mortgage balance to 80% percent of the original value of the home. The Homeowner's Protection Act requires the lender to cancel the PMI cost, when the principal balance reaches 78 percent of the original value of your home.

You must also have a solid payment history, which means you have not been 30 days late with your mortgage payment within a year of your request, or 60 days late within two years.

The lender may require proof that the property's worth has not fallen below its initial value and that there is no second mortgage, such as a home equity loan, on the property. The Homeowners Protection Act does not apply to Veterans Administration (VA) or Federal Housing Administration (FHA) loans.

The following table is a close approximation of the number of years until 20% is reached to eliminate the PMI cost. This example assumes a loan amount of $160,000 at 80% of a $200,000 sales price.

PMI Loan Amortization Schedule
Sales Price 200,000 200,000 200,000
Down Payment 5% 10% 15%
Loan Amount $190,000 $180,000 $170,000
Payoff in years 8.75 6.58 3.67

Q. How to avoid PMI?
A. Obviously, make a 20% down payment or choose a piggyback loan. With this option, the loan amount is broken up into two mortgages. The first mortgage is calculated at 80% of the sales price and the second mortgage reflects the balance. Here's an example of a loan amount of $100,000:

1st mortgage = $100,000 X 80% = $80,000
2nd mortgage = $100,000 less $80,000 less $10,000 (down payment) = $10,000 (2nd loan)

Q. Is PMI required on FHA loans?
A. The terms mortgage insurance premium (MIP) and private mortgage insurance (PMI) are frequently used interchangeably, but there is a distinction.
The FHA lending program is supported by the monthly mortgage payment (MIP).
Unlike PMI, the monthly MIP will never go away, even if you have a 20% down payment or equity in your home.

The FHA mortgage insurance is only available in monthly installments.
The FHA does not utilize credit scores as a premium component, but it does use down payment and mortgage length to determine monthly mortgage insurance costs. The FHA mortgage insurance formula is straightforward.
Divide the loan amount by the yearly premium and multiply by 12. (months).
For those with poor credit, FHA mortgage insurance is much cheaper.
Read more about the FHA loan program

Q. Why do banks want a 20% down payment?
A. Over the years, the banks have found that when there's at least 20% equity (down payment), they can easily sell the home after foreclosure at 80% of the value of the home.