PMI vs. MIP: What’s the Difference?

Learn How Common Types of Mortgage Insurance Work

If you’re comparing loan options or reviewing the costs on a mortgage estimate, you may be wondering why you have mortgage insurance. There are two types of mortgage insurance you’ll potentially run into — MIP and PMI. Both will increase your monthly payment, but each applies to different loan programs and follows different rules.

Private mortgage insurance (PMI) is for conventional loans and is a temporary payment until you’ve built sufficient equity in your home. In comparison, you’ll pay a mortgage insurance premium (MIP) with an FHA loan, and in some cases, it can be permanent.

Let’s look at the biggest differences between MIP vs. PMI and how each one works. Understanding the average costs for each and how long they last can help you choose the best mortgage option for your situation.

PMI and MIP Key Differences

If you’re trying to understand how mortgage insurance works and why it’s required, it’s helpful to compare PMI and MIP side-by-side. Both protect the organization that backs your loan (Fannie Mae, Freddie Mac, or the FHA) and increase your monthly payment, but there are differences between the two. The following table shows an overview of both.

PMI: Private Mortgage Insurance for Conventional Loans

Private mortgage insurance applies to conventional loans rather than government-backed loans (like FHA loans). Lenders are usually required to add PMI to a loan anytime a borrower makes a down payment below 20% to compensate for the additional risk. PMI protects Fannie Mae or Freddie Mac if the borrower defaults on their loan.

For example, if you’re buying a home with a conventional mortgage and making a down payment of 10%, you’ll have to take out PMI. If you make a down payment of 20% or more, PMI won’t apply since you’re starting out with sufficient equity in the home.

PMI is commonly paid as part of your monthly mortgage payment, though some loans allow for upfront payments. The cost varies based on factors like your down payment amount, credit score, loan size, and loan term, which is why the exact costs vary for different borrowers. The biggest advantage of PMI over MIP is that PMI is temporary — it ends once you reach 20% equity in your home.

PMI Pros and Cons

PMI can make homeownership more accessible for borrowers with a lower down payment, but there are trade-offs to consider.

MIP: Mortgage Insurance Premiums for FHA Loans

MIP insurance is required on all FHA loans and protects the FHA if the borrower defaults on their loan. Unlike PMI, MIP is always required by the FHA regardless of your down payment amount. You’ll have to pay a one-time upfront mortgage insurance premium and an ongoing annual premium. The upfront MIP is 1.75% of the total loan amount, while the annual MIP usually ranges from 0.15% to 0.75% of the total loan amount.

For example, let’s say you take out a $250,000 FHA loan. That means you’ll have a one-time $4,375 upfront MIP due at closing, and an annual MIP (that’s 0.15% to 0.75% of your loan amount) divided into monthly installments and added to your mortgage payment.

How much and how long you’re required to pay MIP depends on your finances and the size of your down payment (and the type of FHA loan). If your down payment is less than 10%, you’re typically required to pay MIP for the life of the loan. If your down payment is 10% or more, MIP ends after 11 years. Using a tool like a Home Affordability Calculator can help you estimate your future loan costs.

MIP Pros and Cons

MIP can be helpful for borrowers with poor credit or little money for a down payment (because it allows them to qualify for a mortgage), but there are downsides to consider.

Mortgage Insurance for VA Loans and USDA Loans

VA loans and USDA loans don’t have mortgage insurance requirements. These loans do have fees that help don’t have mortgage insurance requirements. These loans do have fees that help fund the mortgage programs, however. When you finance a home with a VA loan, you will need to pay a one-time VA funding fee. Disabled veterans and some surviving spouses are exempt from paying this fee. When you finance a home with a USDA loan, you’ll need to pay an upfront guarantee fee as well as an annual fee.

Final Thoughts: Is PMI or MIP Right for You?

Both PMI and MIP help lenders manage risk and allow more people to qualify for mortgages. PMI is for conventional loans and offers more flexibility, including its removal once you reach sufficient equity in your home. In comparison, MIP is included with FHA loans and comes with upfront and ongoing costs.

If you’re trying to choose between an FHA and a conventional loan, it’s important to understand the difference between PMI and MIP. Comparing your loan terms, interest rates, and mortgage insurance requirements will help you save the most money and find the best mortgage for your financial situation.