Understanding the Difference Between MIP and PMI
Owning a home remains a significant aspect of the American dream, but it’s more complicated than many realize. As potential homeowners begin obtaining a mortgage, they quickly discover that they need mortgage insurance, a good credit score, and a regular income. To help simplify some of this, here’s a look at the difference between MIP and PMI and how they may affect home loans in Tucson by Altitude Home Loans.
What Is Mortgage Insurance?
When speaking with a mortgage company for the first time, many home seekers expect to pay a minor downpayment on their ideal home. Sticker shock sets in when they learn that most lenders need at least a 20% downpayment on the total of their home’s purchase price. Lenders know that most people don’t have that kind of money, using mortgage insurance to fill that gap.
Mortgage insurance allows you to put a lower downpayment on your home. However, a lower downpayment makes you look less invested in the long-term ownership and payment on a home or property. With mortgage insurance, your mortgage lender has protection if you can no longer make your monthly mortgage payment.
Defining MIP, or Mortgage Insurance Premiums
MIP protects federally backed loans. Typical loans covered by MIP include FHA (Federal Housing Administration) loans and first-time home buyer loans. Borrowers with low credit, low income, and an inability to pay a significant downpayment benefit from MIP.
An upfront mortgage insurance premium, or UFMIP, equals 1.75% of a home loan’s total amount and tacks that additional amount onto loan closing costs. Your monthly mortgage payment includes an equally-divided annual premium for your mortgage insurance, usually .45% to 1.05% of your loan split into 12 payments.
With mortgage insurance premiums, borrowers may pay as little as 3.5% down on their home purchase. They may also receive a better interest rate on their loan, though they may pay more for their mortgage insurance than PMI borrowers. Understanding the difference between MIP and PMI helps you choose which option fits you best.
Defining PMI, or Private Mortgage Insurance
PMI offers greater term flexibility to eligible home buyers who qualify for conventional mortgages. The cost of private mortgage insurance depends on factors such as loan amount, credit score, and annual household income. Generally, PMI borrowers present a lower foreclosure risk to mortgage lenders.
If you choose to pay for a home with a conventional loan, know that PMI may range from .5% to 2% of your initial loan amount. Most homeowners can expect their PMI to be around 1% of their loan. PMI payments typically cost significantly less than MIP.
Can I Cancel Mortgage Insurance?
You can request the removal of PMI after you’ve reached 20% of your home equity. FHA MIP requires that you make a down payment of more than 10% of the home loan to qualify you for cancellation. If you don’t pay at least 10% down, you must pay for MIP throughout your loan’s lifetime.
Are you interested in purchasing a home in Tucson, AZ? Contact Altitude Home Loans to pre-qualify today. Learn more about Private Mortgage Insurance and about the difference between MIP and PMI.