Mortgage Insurance Premium, Explained
If you’re a first-time mortgage borrower, you might be asking yourself, “What is MIP?” Home buyers considering getting a loan from the Federal Housing Administration will find MIP, or mortgage insurance premium, especially relevant because all FHA loans require insurance.
Here’s what you need to know about MIP, including the rate you can expect to pay and how these fees actually benefit home buyers who qualify for FHA loans.
What is MIP?
Essentially, MIP is an insurance policy required by the government on an FHA loan. Since the down payment on FHA loans can be as little as 3.5% of the total price, the government requires added financial protection.
“The purpose of mortgage insurance is to protect the lender, not the borrower,” says Brian Sullivan, the supervisory public affairs specialist for the FHA. “With FHA loans, the insurance is to protect the federal government in the event a borrower defaults on the mortgage.”
How does MIP work?
When you receive approval for a loan, the FHA will require you to pay an upfront MIP (UFMIP) at the time of closing and an annual MIP, which is calculated every year and paid once a month.
Currently, the UFMIP rate is 1.75% of the amount of your FHA loan. For example, if you borrow $250,000, your upfront costs would be $4,375. The current annual premium rate is 0.85% for most FHA loans.
The UFMIP will be part of the total closing expenses, which include your mortgage principal, interest, property taxes, and homeowners insurance. You can also roll the cost of the UFMIP into your escrow payments.
How does MIP benefit the homeowner?
The MIP protects the lender, but this fee is also what allows buyers to put as low as 3.5% down on a home. Essentially, an MIP puts homeownership in reach for many who wouldn’t be able to afford it otherwise.
“Lenders are much more willing to lend money for the purchase or refinance of a home knowing they’re protected against loss,” Sullivan says.
Can you cancel an MIP policy?
In the past, you could dump your MIP once you reached at least 20% equity in your home. But the housing crisis changed a lot of things, including insurance on FHA loans. Now, you must maintain the MIP for the life of the FHA loan.
Because of this, there’s only one option if you want to cancel your MIP: You can refinance your FHA loan to a conventional loan. It’s important to note that if you don’t have 20% equity in your home, you’ll still have the requirement of carrying private mortgage insurance until you reach that threshold.