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You’re here to answer the million-dollar question: What is mortgage insurance? Or maybe you’re here to learn the difference between mortgage insurance premiums (MIPs) and private mortgage insurance (PMI). Either way, you’ve come to the right place.
Rule number one: To differentiate between MIP and PMI, you’ll need to know the different types of mortgage options out there. The type of mortgage you get will determine the type of mortgage insurance you’ll pay.
Home buyers typically take one of two routes when buying a home – they either opt for a government-backed loan or a conventional loan.
FHA loans are government-backed loans, and they come with mortgage insurance premiums. Conventional loans are private loans. Borrowers pay private mortgage insurance on conventional loans if they make less than a 20% down payment on a house.
If you’re considering an FHA loan, you’ll definitely want to learn everything there is to know about mortgage insurance premiums. It’s important to know how much MIP costs and how long you’ll pay it – but we can also tell you how to avoid it.
What Is Private Mortgage Insurance and How Does It Work?
Mortgage insurance protects the lender in case a loan goes into default. The mortgage insurance is a premium you pay until you have a high enough level of home equity.
If you make a 20% down payment on a conventional loan, you’ll eliminate the need for mortgage insurance. Anything less, and you’ll have to pay PMI. This PMI is mandatory for borrowers to qualify for a mortgage.
What Are Mortgage Insurance Premiums (MIPs)?
MIP is required for most government-backed FHA loans. You can typically qualify for an FHA mortgage loan with a 580 credit score. In fact, you can qualify with a 500 credit score if you can make a 10% down payment. FHA loans make it easier for first-time home buyers and home buyers with debt or credit issues to qualify for a mortgage loan.
How Much Does MIP Cost?
To answer this question, it’s helpful to know that MIP is divided into two payments:
The upfront premium
The FHA upfront mortgage insurance premium equals 1.75% of the amount of the loan. If you took out a $300,000 mortgage, the fee would be $5,250.
You can pay the fee at closing or have it rolled into your monthly mortgage payments. You won’t have to pay this fee again unless you refinance or buy another property with an FHA loan.
The annual premium
The annual fee ranges from 0.45 – 1.05% of your outstanding loan balance. The fee’s cost depends on the loan amount, the length of the loan and the size of your down payment. Most lenders take the fee, divide it by 12 and fold it into a borrower’s monthly mortgage payment.
Let’s look at the anatomy of the annual fee. The fee is usually based on:
- How much you borrow: Whether the amount you borrow is more or less than $625,000.
- Down payment/loan-to-value (LTV) ratio: LTV is the loan amount (what you owe) divided by the current value of the home. For first-time home buyers, LTV is usually based on the size of the down payment they make.
- Loan term: It’s the amount of time you have to fully repay a loan.
If your mortgage term is greater than 15 years
|Amount Borrowed||Down Payment (LTV)||Annual MIP|
|$625,500 or less||10% or more (90%)||0.8% annually for 11 years|
|$625,500 or less||Between 5% – 10% (90% – 95%)||0.8% annually for the life of the loan|
|$625,500 or less||Less than 5% (95%)||0.85% annually for the life of the loan|
|More than $625,500||10% or more (90%)||1.00% annually for 11 years|
|More than $625,500||Between 5% – 10% (90% – 95%)||1.00% annually for the life of the loan|
|More than $625,500||Less than 5% (95%)||1.05% annually for the life of the loan|
If your mortgage term is 15 years or less
|Amount Borrowed||Down Payment (LTV)||Annual MIP|
|$625,500 or less||10% or more (90%)||0.45% annually for 11 years|
|$625,500 or less||Less than 10% (90%)||0.7% annually for the life of the loan|
|More than $625,500||22% or more (78%)||0.45% annually for 11 years|
|More than $625,500||Between 10% – 22% (90% – 78%)||0.7% annually for 11 years|
|More than $625,500||Less than 10% (90%)||0.95% annually for the life of the loan|
How Long Do You Pay MIP?
If you put 10% down on your mortgage, you’ll pay MIP for 11 years. If you make a down payment that’s less than 10% down, you’ll pay MIP for the life of the loan.
But the good news is that there may be strategies to get rid of (or even avoid) MIP.
How Do You Avoid Mortgage Insurance Premiums?
Here are some methods to avoid MIP:
Pick another loan type
FHA loans aren’t the only government-backed loans in town. See if you’re eligible for one of these programs:
- Department of Veterans Affairs (VA) loans: These government-backed loans are available to eligible veterans, active duty service members and qualified surviving spouses. VA loans don’t require down payments. While there’s no mortgage insurance requirement, VA loans do require an upfront VA funding fee, which typically ranges between 1.4% – 3.6% of a loan’s value. The funding fee is a one-time cost usually folded into monthly mortgage payments.
- U.S. Department of Agriculture (USDA) loans: These loans offer 0% down, low-interest mortgages for borrowers who meet specific income requirements and buy homes in designated rural areas. A USDA loan comes with a 1% upfront fee (which is usually paid at closing but can be folded into monthly mortgage payments) and an annual fee that equals 0.35% of the loan amount. The annual fee can be converted into a monthly fee and added to your monthly mortgage payment.
If you have 20% equity in your home, you can refinance from a government-backed loan to a conventional mortgage. Because the home has 20% equity in it, you’ll avoid paying PMI.
This may not be an option you’d like to consider, but if you delay buying a home, you’ll increase the amount of time you have to save for a 20% down payment. Having a sizable down payment can help avoid PMI.
Other Types of Mortgage Insurance Coverage
Other types of mortgage insurance coverage shouldn’t be confused with PMI and MIP. For example:
- Mortgage life insurance: This insurance protects the heirs of a property if a borrower dies with outstanding mortgage payments.
- Mortgage disability insurance: This long-term disability insurance covers the borrower’s mortgage payments if they can’t work (and make payments) because of illness or injury.
- Mortgage title insurance: This type of insurance protects the buyer and lender against loss in a sale if the ownership of the property (title) is in question, making a home sale not possible.
Make Sure You Know How Mortgage Insurance Premiums Work
Many aspiring homeowners will see paying MIPs as a worthwhile price to own a home. An FHA loan is a legitimate option for borrowers who are eager to buy, have encountered past credit or debt issues or have little down payment saved.
But take a little time to calculate how much you’ll pay in MIP fees. This number could impact your decision to move ahead with an FHA loan or not.
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U.S. Department of Housing and Urban Development. “HUD Discontinuing Premium Payments.” Retrieved December 2021 from https://www.hud.gov/program_offices/housing/comp/premiums/prem2001
U.S. Department of Housing and Urban Development. “APPENDIX 1.0 – MORTGAGE INSURANCE PREMIUMS.” Retrieved December 2021 from https://www.hud.gov/sites/documents/15-01MLATCH.PDF
Internal Revenue Service. “Publication 936 (2020), Home Mortgage Interest Deduction | Internal Revenue Service.” Retrieved December 2021 from https://www.irs.gov/publications/p936
U.S. Department of Veterans Affairs. “VA funding fee and loan closing costs.” Retrieved December 2021 from https://www.va.gov/housing-assistance/home-loans/funding-fee-and-closing-costs/
USDA Rural Department. “USDA Rural Development Reducing Fees Make Home Loans More Affordable.” Retrieved December 2021 from https://www.rd.usda.gov/newsroom/news-release/usda-rural-development-reducing-fees-make-home-loans-more-affordable