Depending on the type of mortgage you are applying for, how large a down payment you are making, and your credit score and DTI ratio, you may be required to purchase insurance along with your monthly payments on your home loan.
Usually, this type of insurance is referred to as “private mortgage insurance,” or PMI. But there is another type of insurance which is similar called “mortgage insurance premiums,” or MIP.
While these two terms are often used interchangeably (it is common for people to reference PMI when they mean MIP), they are not identical. What is the difference between the two?
Private Mortgage Insurance (PMI)
If you have a conventional mortgage, the type of insurance you may need to purchase is private mortgage insurance (PMI).
If you make a down payment of at least 20% on the home you purchase with a conventional mortgage, you probably will not have to purchase private mortgage insurance.
But if you put down less than 20% (which is common), PMI may be an ongoing requirement.
Usually, the cost of PMI will come out to around 0.5% to 2% of the amount of your home loan.
The lower your credit score and the smaller the down payment you make, the more expensive PMI will be.
So, if you want to avoid paying for private mortgage insurance, it is in your interest to raise your score as much as possible and to put down a larger down payment if you can.
Once you own 20% equity in your home, you can request that the private mortgage insurance requirement be dropped from your mortgage. But that does not mean that the lender will necessarily grant you request. Note that all requests need to be made in writing in order to be valid.
Eventually, as you continue to pay on your home, you will reach 78% LTV. By law, the lender must cancel the private mortgage insurance automatically at that point. This assumes that you are current on your mortgage payments and no lien exists against your home.
Key Point: Private mortgage insurance (PMI) is the type of insurance you purchase if required to do so when you take out a conventional mortgage.
Mortgage Insurance Premiums (MIP)
Mortgage insurance premiums (MIP) are the insurance payments that you make when you take out an FHA loan rather than a conventional mortgage.
For context, an FHA mortgage is one which is guaranteed by the Federal Housing Administration (FHA).
You will commonly hear this type of insurance referred to as PMI. While it is similar, this is technically not the correct name.
Most people are attracted to FHA mortgages in part because of the low-down payment requirements and looser credit restrictions.
But regardless of your credit score and your down payment amount, paying for MIP is required with an FHA loan.
MIP may or may not expire as a requirement, depending on the origination date of your loan.
MIP on FHA mortgages dating before June 3rd, 2013 expires at a different point than those which originated after that date.
In fact, for some FHA loans originating after June 3rd, 2013, MIP is a permanent feature with no possibility of cancellation. It depends on your original down payment as well as the loan term. If your down payment was less than 10% and the term of the loan is 20, 25 or 30 years, you could find yourself in this situation.
But for mortgages that originated before June 3rd, 2013, MIP will be canceled at 78% LTV once a minimum five-year period has elapsed, even if all other terms are the same as they were for the example above.
This is why if you are taking out an FHA mortgage, it is important to look up the exact rules which govern MIP given the loan term you have selected, and the down payment amount you will be making.
Key Point: MIP is the name for the type of insurance which is required when you take out an FHA loan. Whether it is canceled and when depends on a variety of factors.
How to Get Rid of PMI or MIP
Above, we discussed how your PMI or MIP requirement may eventually expire, depending on the specific type of mortgage you have and the terms governing it.
But what if you cannot get your lender to grant your request to remove your PMI? Or what if you have an MIP requirement which never expires?
At that point, you might want to consider refinancing to a mortgage which does not require you to purchase PMI or MIP.
If you have a competitive borrower profile, there is a good chance that you will be able to refinance successfully and start saving money every month.
Buy a Home or Refinance in VA with a Competitive Mortgage
Whether you are looking for a loan to purchase a home now or you want to refinance an existing mortgage, we can connect you with a competitive home loan which you can afford.
To schedule your consultation, please give us a call at (540) 838-5868.
