Comparing Private Mortgage Insurance vs. Mortgage Insurance Premium

An Overview of Private Mortgage Insurance vs. Mortgage Insurance Premium

If you want to buy a house, you'll need to understand the differences between PMI and mortgage insurance premium.

Mortgage insurance provided by a private company

Private mortgage insurance is a type of insurance used in conventional loans to protect lenders from default and foreclosure. It allows buyers who can't afford to put down a large down payment (or don't want to) to get mortgage financing at a reasonable rate.

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[Important: If you buy a house with less than a 20% down payment, your lender will require you to obtain PMI insurance from a firm before signing off on the loan.]

PMI costs vary depending on the size of the down payment and loan, but it normally ranges from 0.5 percent to 1% of the loan amount.

If you have monthly PMI (borrower paid), you must pay a premium every month until your PMI is either terminated or reduced (when your loan balance is scheduled to reach 78 percent of the original value of your home)

Because your equity in the home has reached 20% of the purchase price or appraised value, the loan has been canceled at your request (your lender will approve a PMI cancelation only if you have adequate equity and have a good payment history)

you reach the halfway point of the loan (a 30-year loan, for example, would hit the halfway mark after 15 years).

Single premium PMI, in which the mortgage insurance premium is paid upfront in a single lump sum either at closing or financed into the mortgage, and lender-paid PMI (LPMI), in which the cost of the PMI is incorporated in the mortgage interest rate throughout the life of the loan, are two further types of PMI.

Premiums for Mortgage Insurance

In contrast, a mortgage insurance premium (MIP) is an insurance coverage utilized in FHA loans if the down payment is less than 20%. The FHA calculates a "upfront" MIP (UFMIP) at the time of closing or an annual MIP that is calculated annually and paid in 12 installments. The annual MIP rate you pay is determined by the length of your loan and the loan-to-value (LTV) ratio. You'll owe a greater percentage if your loan balance surpasses $625,500.

If your loan term is higher than 15 years, and your loan debt reaches 78 percent of the home's initial price—the purchase price mentioned on your mortgage documents—FHA mandates that you make your monthly MIP payments for a full five years before MIP can be eliminated. However, if your FHA loan was taken out after June 2013, new rules will apply. If your original LTV is less than 90%, you'll have to pay MIP for 11 years. If your LTV is larger than 90%, you'll have to pay MIP throughout the duration of the loan.

TAKEAWAYS IMPORTANT

• If you buy a house with less than a 20% down payment, your lender will require you to obtain private mortgage insurance (PMI) before signing off on the transaction.
• If you have a down payment of less than 20% on an FHA loan, you will need to pay a mortgage insurance premium.
• If your FHA loan was originated after June 2013, the rules are different.