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Difference between PMI and MIP?

Private mortgage insurance graphicIf you're thinking about purchasing a home, you may have heard the term "PMI" (private mortgage insurance). So what is it?

Private mortgage insurance (PMI) is insurance that mortgage lenders require from home buyers when the down payment is less than 20 percent on a "conventional" mortgage.

Needless to say, many prospective home buyers are unwilling or unable to come up with a twenty percent down payment. So, the lender will accept your down payment and ask a private mortgage insurance company to "guarantee" the difference between your down payment and the required twenty percent.

For example, if your down payment is 5%, the private mortgage insurance company will pay the lender the "missing" 15% down payment if you default on the mortgage. A "PMI" fee is paid to the private mortgage insurance company for the default guarantee. Private mortgage insurance companies offer different payment plans, including monthly, a one-time upfront payment and a combination between the single premium and monthly plan. Another popular option is the lender paid PMI. Many mortgage lenders will pay the PMI cost on behalf of the borrower in exchange for a slightly higher interest rate.

How much is PMI insurance?

Emoticon thumbs downThe private insurance premium is based on down payment, property location, credit score, the term of the mortgage (15 year mortgages pay less), and a few other factors.

The cost of private mortgage insurance is higher in high default states.

The mortgage insurance rates vary between private mortgage insurance companies and the PMI rates can change over the course of the year.

There are four popular ways of paying the private mortgage insurance. The following examples illustrate the PMI cost under the PMI plans.

1. Monthly plan (also known as borrower paid MI)

The monthly PMI plan is the most popular payment plan, probably because it's the easiest calculation for the loan officer. The following examples assume a purchase with a 30 year term with a "fixed" interest rate.

Here's an example of the monthly PMI premium. Notice how the monthly premium decreases as the down payment increases.

Down Payment PercentageLoan AmountCredit ScorePremium FactorMONTHLY COST
3% 194,000 7000.99% 160.05
5% 190,000 7000.78% 123.50
10% 180,000 7000.55% 82.50
15% 170,000 7000.25% 35.42
The mortgage insurance premium factor increases as the credit score decreases and decreases as the credit score increases.

2. Borrower paid single premium

The single premium PMI is a lump sum payment at settlement (or financed with the loan). No further payment is made to the mortgage or private mortgage insurance company. The single premium is often used in conjunction with seller paid closing costs. Home sellers are permitted to pay a percentage of the buyer's closing costs, and that includes the PMI premium. Read more about seller paid closing costs

The single premium is offered as refundable and non-refundable. The refundable option means that if the loan is paid off early, a percentage of the single premium will be refunded to the borrower. The non-refundable choice does not refund any unearned premium if the loan is paid off early. The non-refundable single premium is less expensive.

Down Payment PercentageLoan AmountCredit ScorePremium FactorOne time payment
3% 194,000 7003.18% 6,169.20
5% 190,000 7002.52% 4,788.00
10% 180,000 7001.75% 3,150.00
15% 170,000 7000.71% 1,207.00

3. Split premium

The split premium option is a combination of the single premium and monthly premium. Borrowers can pay a percentage of the mortgage insurance at settlement and a reduced amount each month. The larger the upfront percentage, the lower the monthly cost. The credit score also affects the monthly cost.

Down Payment PercentageLoan AmountCredit ScoreUpfront Premium FactorMonthly premium factorOne time paymentMonthly payment
3% 194,000 7000.50%1.06% 970.00 171.37
5% 190,000 7000.50%0.76% 950.00 120.33
10% 180,000 7000.50%0.47% 900.00 70.50
15% 170,000 7000.50%0.10% 850.00 14.17

4. Lender paid mortgage insurance (LPMI)

The fourth option is the lender paid mortgage insurance, LPMI. With this choice, the lender pays a single premium to the mortgage insurance company and charges the borrower a higher interest rate. This payment method should be compared against the monthly payment to determine whether it is a better option. The choice is a higher interest rate or a monthly mortgage insurance cost that will drop off in the future.

Rotating question mark  Frequently Asked Questions About PMI & MIP

Q. Can I refinance to remove PMI?
A. Refinancing your mortgage can be a good way to eliminate the PMI, provided that the new loan amount is 80% or less than the home's market value

Q. How Can I Get Rid of PMI?
A. Under The Homeowner's Protection Act, you have the right to request termination of PMI premium when you reduce your mortgage balance to 80% percent of the original value of the home. The Homeowner's Protection Act requires Happy emoticonthe lender to cancel the PMI cost, when the principal balance reaches 78 percent of the original value of your home.

You also need a good payment history, which means that you have not been 30 days late with your mortgage payment within a year of your termination request, or 60 days late within two years.

The lender may require evidence that the value of the property has not declined below its original value and that the property does not have a second mortgage, such as a home equity loan. The Homeowner's Protection Act does not apply to Veterans Administration (VA) loans or FHA loans.

The following table is a close approximation of the number of years until 20% is reached to eliminate the PMI cost. This example assumes a loan amount of $160,000 at 80% of a $200,000 sales price.

PMI Loan Amortization Schedule
Sales Price 200,000 200,000 200,000
Down Payment 5% 10% 15%
Loan Amount $190,000 $180,000 $170,000
Payoff in years 8.75 6.58 3.67

Q. How to avoid PMI?
A. Obviously, make a 20% down payment, or choose a piggyback loan. With this option, the loan amount is broken up into two mortgages. The first mortgage is calculated at 80% of the sales price and the second mortgage reflects the balance. Here's an example of a loan amount of $100,000:

1st mortgage = $100,000 X 80% = $80,000
2nd mortgage = $100,000 less $80,000 less $10,000 (down payment) = $10,000 (2nd loan)

Q. Is PMI required on FHA loans?
A. Mortgage insurance premium (MIP) is often used interchangeably with PMI, but there is a difference. The monthly mortgage premium (MIP) is used to support the FHA loan program. Unlike PMI, the monthly MIP will never go away, even if you have a 20% down payment or equity. The FHA mortgage insurance is only offered as a monthly payment plan. The FHA does not use credit scoring as a premium factor, but the FHA does use down payment and mortgage term to calculate the monthly mortgage insurance cost. The FHA mortgage insurance formula is simple. Take the loan amount X the annual premium and divide the result by 12 (months). The FHA mortgage insurance is considerably lower for depressed credit scores.
Read more about the FHA loan program

FHA mortgage insurance table

Q. Why do banks want a 20% down payment?
A. Over the years, the banks have found that when there's at least 20% equity (down payment), they can easily sell the home after foreclosure at 80% of the value of the home.