FHA MIP: Is FHA Mortgage Insurance the Same as PMI?

When buying a house, you may need to pay for mortgage insurance, which protects lenders if you fall behind on payments and can help you qualify for a loan. Conventional loans require private mortgage insurance (PMI), while Federal Housing Administration (FHA) loans require an FHA Mortgage Insurance Premium (MIP).

What is FHA mortgage insurance?

MIP—the term for FHA PMI—is required on all FHA loans, a program designed for first-time homebuyers. It includes an upfront premium paid at closing and an annual cost added to your monthly mortgage payment for the loan’s life.

MIP reduces the lender’s risk by covering some or all losses if you default on your loan, enabling lenders to accept riskier borrowers with lower credit scores and smaller down payments. This is why FHA loans have less stringent qualification requirements compared to other loan options. Note that when we use the term “FHA PMI,” we are referring to MIP.

FHA PMI rules

FHA PMI, or MIP, has specific rules that borrowers must follow:

• Upfront premium: FHA loans require an upfront mortgage insurance premium (UFMIP) of 1.75% of the loan amount, paid at closing or financed into the loan.
• Annual premium: In addition to the upfront premium, borrowers must pay an annual MIP. This annual premium is divided into monthly installments and added to your mortgage payment. The rate can range from 0.45% to 1.05% of the loan amount, depending on the loan term, loan amount, and loan-to-value (LTV) ratio.
• Duration of MIP: For loans with an LTV greater than 90%, the annual MIP must be paid for the entire loan term. For loans with an LTV ratio of 90% or less, MIP payments are required for the first 11 years.
• MIP removal: Unlike private mortgage insurance (PMI), FHA MIP cannot be removed by reaching a certain amount of equity. For loans originated after June 3, 2013, MIP remains for the life of the loan unless you refinance into a non-FHA loan.

These rules are designed to protect lenders and ensure the FHA program can continue to help borrowers with less stringent qualification requirements.

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FHA MIP vs. PMI

The key difference between MIP (on FHA loans) and PMI (on conventional loans) is that MIP is always required for FHA loans, while PMI is only sometimes required for conventional loans.

MIP costs vary but are mandatory if you take out an FHA mortgage. For conventional loans, mortgage insurance is typically required based on the size of your down payment and can be canceled once the borrower reaches an 80% loan-to-value (LTV) ratio. By law, lenders must remove PMI once the LTV hits 78%.

MIP includes upfront and annual premiums, while PMI only has an annual premium, paid monthly. Here’s a cost breakdown for the same home purchase with either PMI or MIP:

• Home purchase price: $250,000
• Down payment: 10%
• Loan term: 30 years
• FHA loan rate: 4%

	FHA MIP	PMI
Total loan amount	$225,000	$225,000
Upfront mortgage insurance costs	$3,937.50	$0
Annual mortgage insurance premiums	$1,800	$2,812.50
Years paid	11	6
Total insurance costs	$23,737.50	$16,875

In this scenario, we assumed a PMI rate of 1.25%. As you can see, the total insurance costs for FHA MIP are higher due to the upfront premium and longer duration of payments.

How much does FHA mortgage insurance cost?

FHA mortgage insurance includes upfront and annual costs. The upfront MIP is 1.75% of your total loan balance, paid at closing. The annual mortgage insurance premium (MIP) is paid monthly and depends on the loan amount and down payment.

Here’s what these charges look like for a 30-year loan:

Original loan amount	Down payment	Annual MIP premium
$625,500 or less	5% or more	0.80%
	Less than 5%	0.85%
More than $625,500	5% or more	1%
	Less than 5%	1.05%

For a mortgage with a term of 15 years or shorter, the charges are:

Original loan amount	Down payment	Annual MIP premium
$625,500 or less	10% or more	0.45%
	Less than 10%	0.70%
More than $625,500	22% or more	0.45%
	10 to 21%	0.70%
	Less than 10%	0.95%

These costs are designed to protect lenders by covering potential losses from defaults, allowing borrowers with lower credit scores and smaller down payments to qualify for FHA loans.

FHA PMI removal

Before 2013, borrowers could stop paying MIP once they reached a 78% loan-to-value ratio. Now, rules for removing MIP from an FHA loan are stricter.

To remove FHA MIP, your loan must have an LTV ratio of 90% or less at closing, requiring a 10% down payment. In this case, you will pay MIP only for the first 11 years of the loan. Borrowers with less than a 10% down payment cannot cancel MIP at all.

Another option to remove MIP is refinancing into a conventional mortgage. Here’s how you can do it:

How to get rid of PMI on FHA loans via refinance

Refinancing your FHA loan into a conventional mortgage allows you to remove MIP. However, conventional loans typically require mortgage insurance if your down payment is less than 20%. To avoid this, wait until you have at least 20% equity in your home before refinancing.

Conventional loans have stricter qualifying standards than FHA loans. Most lenders require a credit score of at least 620, so ensure your credit score is strong before pursuing this option.

Refinancing can offer additional benefits, such as lowering your interest rate, reducing your monthly payment, and helping you pay off your home sooner. It also allows you to tap into your home equity to fund renovations, tuition, medical bills, and other expenses.

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FAQ

Does FHA PMI exist?

Yes, FHA loan private mortgage insurance exists, but it is typically referred to as FHA mortgage insurance premium (MIP). PMI stands for private mortgage insurance, used with conventional loans, and MIP is the equivalent of private mortgage insurance on FHA loans to protect lenders from defaults.

How do I know whether refinancing is right for me?

Refinancing may be a good option if you can secure a lower interest rate, reduce your monthly payments, or eliminate MIP by switching to a conventional loan. However, it’s important to consider the costs associated with refinancing, such as closing costs, and ensure your credit score is strong enough to qualify for favorable terms.