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What is MIP (Mortgage Insurance Premium)?
What you'll learn: What you need to know about mortgage insurance premium, or MIP for an FHA loan.
EXPECTED READ TIME: 4 MINUTES
October 28, 2024
Federal Housing Administration (FHA) mortgages are known for advantages like flexible credit score requirements, low down payment options, and more. However, as a government-backed home loan, they require mortgage insurance premiums.
MIP does help homebuyers, as it influences lenders to be more willing to loan you money for your home purchase. So, we are breaking down what you need to know about FHA MIP, how it works, and more to help you determine if an FHA mortgage is worth considering.
What is MIP?
MIP, or mortgage insurance premium, is a type of home loan insurance that all FHA borrowers are required to pay. Its purpose is to protect lenders if you default on your mortgage. MIP is required on all FHA loans, regardless of your credit score or the size of your down payment, unlike private mortgage insurance (PMI).
MIP versus PMI: what is the difference?
MIP and PMI are both types of mortgage insurance, but the main differences between the two are the type of loans they are for and the ability to remove it once you have enough equity in your home. For example, all FHA loans require MIP. However, PMI is only applied to conventional loans in instances where the borrower’s down payment is less than 20%.
Most FHA borrowers will need to pay their MIP fees for the life of their mortgage (whether it is a 30- or 15-year term), unless they are able to provide a down payment of 10% or more at closing. In those cases, MIP can be removed after 11 years. PMI, on the other hand, can be removed once you have 20% equity in the home. That means you can avoid paying for it altogether if you are able to provide a 20% down payment at closing on a conventional loan.
Can you avoid the FHA mortgage insurance premium?
Unlike PMI, there is no avoiding FHA loan MIP. In fact, it is the reason FHA requirements are typically more lenient when compared to conventional mortgages. However, it is possible in some cases to remove MIP later on. If you are able to contribute a 10% down payment (or more), you will only have to pay FHA insurance premiums for the first 11 years of the loan term. It is important to note, though, that borrowers who put down less than 10% will have to pay MIP for the life of the mortgage unless they decide to refinance to a conventional loan later on.
How much does FHA MIP cost?
Your FHA loan will have an up-front payment and a monthly mortgage insurance premium (MIP). Your up-front MIP payment will be equal to 1.75% of the total value of your loan and will be due at closing. For example, if your FHA loan total is $250,000, then your up-front MIP payment will total $4,375.
The annual premiums will be based on your initial loan amount, mortgage term, and loan-to-value (LTV) ratio. These are paid each year in monthly installments that are added to your monthly mortgage payments.
3 ways to lower your FHA mortgage insurance premium
While there is no avoiding MIP entirely with an FHA loan, you can utilize certain strategies that can help lower its cost. Here are a few ways FHA borrowers can decrease or remove MIP from their mortgage costs:
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Take time to save for a larger down payment: An attractive feature of FHA home loans is their comparably low-down-payment requirements. However, it is still worth taking some time to save so you can put down at least 10% at closing. This way, you have the option to remove MIP after 11 years.
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Refinance your FHA mortgage once it meets the seasoning requirements: Another commonplace strategy for homeowners looking to circumvent MIP fees is refinancing. Once your FHA loan has surpassed its seasoning period (meaning you have made at least six payments on your current mortgage and it is 210 days past closing) it is eligible for a refinance. You can even stop paying for MIP without switching to PMI once you have 20% home equity.
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Discuss your options with an experienced lender: Whether you are a first-time buyer or experienced homeowner, it is best to talk directly with the experts. A trusted lender will be able to walk you through all of your home loan options. You may find you are eligible for a different type of government-backed loan that does not require MIP.
Despite the added cost of MIP, FHA loans have numerous advantages that can open the door to homeownership for a variety of homebuyers. It is good to compare your options to find the best course of action for your unique situation. Whether you want to reduce mortgage payments by removing MIP, need a new mortgage, or you are thinking about refinancing, take the time to explore every possibility.
SIMILAR ARTICLES
Mortgage Calculator—Know Your Options
Use PenFed's free mortgage calculator and determine your monthly payment, including principal and interest. Calculate conventional, VA, and jumbo home loans.
Cancelling PMI: How to Know When You Qualify
PenFed offers the option to automatically remove your PMI once your mortgage loan reaches a certain value. Here is a look into the details and conditions to receive this removal.
Comparing Types of Mortgages
Need tips for comparing types of mortgages? Discover the answers to what different types of mortgages are available and what type of mortgage is best for you.
What are the Requirements for an FHA Loan?
Learn all about FHA loan rules, including FHA loan amount limits, residence requirements, insurance, and more.
Home Buying Steps
Mortgage Products
Disclosures
1Conventional Loans
Except for holidays, rates are updated Monday through Friday at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on 1.0 discount point, which equals 1.0 percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, conforming, fixed-rate loan. Loan amount of $400,000; loan-to-value ratio of 75%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.
Rates quoted require a loan origination fee of 1%; not to exceed $1,995. Speak to a PenFed Mortgage Loan Officer for additional details.
2FHA Loans
Except for holidays, rates are updated Monday through Friday at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on 1.0 discount point, which equals 1.0 percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, conforming, fixed-rate loan. Loan amount of $400,000; loan-to-value ratio of 96.5%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.
Rates quoted require a loan origination fee of 1%; not to exceed $1,995. Speak to a PenFed Mortgage Loan Officer for additional details.
3VA Loans
Except for holidays, rates are updated Monday through Friday at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on 1.125 discount point, which equals 1.125 percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, conforming, fixed-rate loan. Loan amount of $450,000; loan-to-value ratio of 95%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.
Rates quoted require a loan origination fee of $995.
4Jumbo Loans
Except for holidays, rates are updated Monday through Friday at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on 0.625 discount point, which equals 0.625 percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, non-conforming, fixed-rate loan. Loan amount of $1,009,000; loan-to-value ratio of 70%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.
Rates quoted require a loan origination fee of 1%; not to exceed $1,995. Speak to a PenFed Mortgage Loan Officer for additional details.
Fixed Rate Advance Lock-In You may lock in an Annual Percentage Rate for Advances during the Advance Period. During your Advance Period, you may choose to have three separate Fixed Rate Advances locked in at any one time, with a maximum of two new Fixed Rate Advances per calendar year. Each Fixed Rate Advance must equal or exceed Ten Thousand Dollars ($10,000.00) and you may not request a Fixed Rate Advance that would cause the amount you owe to exceed your Credit Limit. The only term option for your Fixed Rate Advance is 240 months (“Fixed Rate Advance Term”). However, the term of your Fixed Rate Advance cannot exceed your Repayment Period.
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