PMI or MIP may be the ticket to homeownership if you have a down payment of less than 20%, but mortgage insurance adds up over the years and is something to pay attention to.
Private mortgage insurance may be required for conventional home loans, those not backed by the government. Mortgage insurance premium is always a part of FHA-insured loans, at least for years.
Each is intended to protect lenders against losses if borrowers default.
What Is Mortgage Insurance Premium?
Borrowers pay MIP if they’re securing a loan backed by the Federal Housing Administration, no matter the down payment amount or loan term.
MIP runs for the loan’s full term or 11 years. There’s a one-time upfront premium of 1.75% of the base loan amount, which can be rolled into the loan, and an annual premium divided by 12 that is part of the monthly mortgage payment.
A key reason people choose FHA loans is the ability to put down as little as 3.5%.
Additionally, if your heart pounds with excitement when you think about buying a fixer-upper and making it beautiful and functional again, FHA offers the FHA 203(k) home loan for that — something that many lenders won’t do, especially if the home isn’t in good enough shape to be lived in.
With an FHA 203(k) loan, a single source of funding, the interest rate may be slightly higher than other mortgage rates, and the loan can require more coordination. It makes sense to choose contractors to rehab the home who are familiar with the program’s requirements.
How Much Is MIP on an FHA Loan?
The ongoing annual MIP of 0.45% to 1.05% is divided by 12 and added to your monthly mortgage payment. What you’ll pay depends on your loan-to-value (LTV) ratio (think: down payment) and length of the loan.
Taking out an FHA loan for the common 30 years, or anything greater than 15 years, will result in the following rates for 2021 (measured in basis points, or bps):
| Base Loan Amount | LTV | Annual MIP |
|---|---|---|
| ≤ $625,500 | ≤ 95% | 80 bps (0.80%) |
| ≤ $625,500 | > 95% | 85 bps (0.85%) |
| > $625,500 | ≤ 95% | 100 bps (1%) |
| > $625,500 | > 95% | 105 bps (1.05%) |
Here’s an example: Let’s say you borrow less than or equal to $625,500 and have a down payment of 5% or more. You’ll pay an annual MIP of 0.80%. On a home loan of $300,000, that’s $2,400 per year, or $200 per month. (0.0080 x 300,000 = 2,400, divided by 12.)
Some homeowners can pay off their loans quicker so they choose a shorter term, such as 15 years. As a result, they can take advantage of lower MIP, like this:
| Base Loan Amount | LTV | Annual MIP |
|---|---|---|
| ≤ $625,500 | ≤ 90% | 45 bps (0.45%) |
| ≤ $625,500 | > 95% | 70 bps (0.70%) |
| > $625,500 | ≤ 78% | 45 bps (0.45%) |
| > $625,500 | 78.01% – 90% | 70 bps (0.70%) |
| > $625,500 | > 90% | 95 bps (0.95%) |
So if you were to borrow less than or equal to $625,500 and put down at least 10%, you’d pay an annual MIP of 0.45%. On a $300,000 home loan, that’s $1,250 a year, or $112.50 a month.
Can You Get Rid of MIP?
Maybe.
If you took out an FHA loan before June 3, 2013, you may be able to cancel MIP if you have 22% equity in your home and have made all payments on time. (FHA lenders do not automatically cancel your MIP once you reach that home equity threshold. You’ll need to ask.)
If you purchased or refinanced a home with an FHA loan on or after June 3, 2013, and your down payment was less than 10%, MIP will last for the entire loan term.
If you put down 10% or more, you’ll pay MIP for 11 years.
Here’s a chart that sums it up. For loans with FHA case numbers assigned on or after June 3, 2013, FHA will collect the annual MIP as follows:
| Term | LTV | Previous | New |
|---|---|---|---|
| ≤ 15 years | ≤ 78% | No Annual MIP | 11 Years |
| ≤ 15 years | 78.01% to 90% | Canceled at 78% LTV | 11 Years |
| ≤ 15 years | > 90% | Loan Term | Loan Term |
| > 15 years | ≤ 78% | 5 Years | 11 Years |
| > 15 years | 78.01% to 90% | Canceled at 78% LTV and 5 Years | 11 Years |
| > 15 years | > 90% | Canceled at 78% LTV and 5 Years | Loan Term |
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One way to get rid of MIP is to refinance the FHA loan into a conventional loan with a private lender. Many FHA homeowners have enough equity to refi into a conventional loan and give mortgage insurance the heave-ho.
What Is Private Mortgage Insurance?
PMI is typically required when you’re putting less than 20% down on a conventional conforming loan. Most conventional mortgages are “conforming,” which means they meet the requirements to be sold to Fannie Mae or Freddie Mac.
One kind of nonconforming loan, the jumbo loan, which starts at over half a million for a single-family home, does not always require PMI.
Usually homeowners choose to pay PMI monthly, rather than annually, and it is included in monthly mortgage payments. A few may opt for lender-paid mortgage insurance, but for that convenience a homebuyer will usually pay a slightly higher interest rate.
Although PMI adds costs, it can allow you to qualify for a loan that you otherwise might not. And it can help you to buy a house without putting 20% down. In fact, 2 million homebuyers used PMI in 2020 to buy a home, a 53% increase from 2019, according to U.S. Mortgage Insurers.
How Much Does PMI Cost?
PMI varies but often is 0.5% to 1% of the total loan amount annually. The premium amount depends on the type of mortgage you get, LTV, your credit score, and more. It also depends on the amount of PMI that your loan program or lender requires.
According to a 2021 report from the Urban Institute, PMI is more economical than FHA loans for borrowers with a FICO score of 720 or above and who put 3.5% down.
The report also says PMI is more economical for:
• Borrowers with a FICO score of 700 and above who put 5% down
• Borrowers with a FICO score of 680 and above who put 10% down
• Borrowers with a FICO score of 620 and above who put 15% down
• Borrowers with 78% LTV, since it cancels
When Can You Stop Paying PMI?
Buying a home may require you to pay a PMI premium, but there are four methods available to stop paying it.
First, there is a legal end to PMI. Under the Homeowners Protection Act, also known as the PMI Cancellation Act, your lender is required to cancel PMI automatically once your mortgage balance is at 78% of the home’s original value. “Original value” generally means either the contract sales price or the appraised value of your home at the time you purchased it, whichever is lower (or, if you have refinanced, the appraised value at the time you refinanced). Which figure is used for original value can vary by state.
Second, you can reappraise your home, which will likely result in a new value. Thus, you can ask your servicer to cancel PMI based on your built equity and the current value. Owners of homes that appreciated, either over time or thanks to home improvements, may benefit from this. You may need to be proactive with your lender and meet specific eligibility requirements to help make that happen.
Third, you may be able to refinance your mortgage. If you have at least 20% equity, you can possibly qualify for a conventional loan without the need for PMI.
Finally, the Consumer Financial Protection Bureau notes another way in which PMI can be canceled: If you’re current on your payments and you’ve reached the halfway point of the loan’s schedule, even if your mortgage balance hasn’t yet reached 78% of the home’s original value.
What About Refinancing?
If you have a mortgage that includes PMI or MIP and your property value has increased significantly, one option to consider is refinancing.
Some borrowers may find that they are now able to qualify for a conventional home loan without mortgage insurance.
Refinancing holds appeal because of the possibility of locking in a better rate and reducing your monthly payment. Equity-rich homeowners sometimes like a cash-out refinance.
But as with your original mortgage, you’ll face closing costs if you refinance.
What about a “no cost refinance” you might see advertised? You’ll either add the closing costs to the principal or get an increased interest rate.
The Takeaway
Glass half-full: Private mortgage insurance and mortgage insurance premium open the door to homeownership to many who otherwise could not buy a property. Glass half-empty: PMI and MIP can really add up.
If you’re in the market for a home loan, know that SoFi offers mortgages with competitive rates as well as refinancing.
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