MIP, or mortgage insurance premium, is an essential part of certain home loans—specifically those backed by the Federal Housing Administration (FHA). Just like PMI (private mortgage insurance).
Your down payment amount will impact how long you pay MIP. For example, if you put 10% of your total home’s purchase price down, or more, you will pay MIP for 11 years. Whereas if you put less than 10% down, you will pay MIP for the lifetime of the loan (until you sell or refinance).
While it might seem like an excessive fee, it ultimately allows lenders to give people loans with lower down payments, and that allows more people to get in on home ownership much faster—that’s incredibly important. And note that mortgage companies are required to have the MIP—unlike charging lender fees, it’s not a way to sneak in more money.
To get the best price, take a look at today’s rates for FHA loans.
How much does a MIP cost?
MIP adds an extra cost to your mortgage, typically in two ways: upfront and annual payments. For FHA loans, the upfront MIP is usually 1.75% of the loan amount, while the annual premium ranges from 0.45% to 1.05%, depending on factors like your loan term (e.g., 30-year mortgage vs. 15-year), loan-to-value ratio (LTV), and the size of your loan. It’s worth noting that in March of 2023, streamlined the annual MIP rate to 0.55% for most borrowers.
For example, on a $300,000 FHA loan, your upfront MIP would be $5,250, and the annual premium at 0.55% would cost $1,650, spread out over monthly payments. That means, on top of your regular mortgage payment, MIP would add around $137.50 per month.
How long you’ll pay MIP
How long you’re on the hook for MIP depends on your down payment and loan type:
- If you put down 10% or more: MIP drops off after 11 years.
- If you put down less than 10%: You’re locked into paying MIP for the life of the loan—until you sell, refinance, or pay it off.
That said, most buyers don’t stay in their FHA loan forever. On average, homeowners either sell or refinance after about 8 years. If you refinance into a conventional loan and have more than 20% equity built up in your home, you won’t need to pay mortgage insurance anymore. This is a common strategy to get rid of MIP once your home’s value has increased or you’ve paid down enough of the loan.
So, if you take out a 30-year FHA loan with a 5% down payment, you’re technically paying MIP for 30 years unless you make a move. But realistically, if you’ve built up 20% equity, refinancing into a conventional loan can help you ditch the MIP and save on those extra monthly costs. It’s all about hitting that equity sweet spot to cut loose!
Who decides how much the MIP should be? Can I shop for a lower cost MIP?
MIP rates are set by the FHA (Federal Housing Administration), not individual lenders. The FHA determines standard rates based on factors like loan amount and down payment size, effectively “selling” the mortgage insurance while lenders act as middlemen.
The catch? You, the borrower, pay for it through upfront and annual premiums. While you can’t directly shop for different MIP rates, you can compare lenders’ overall loan offers. Here at Tomo Mortgage we have no lender fees, and some of the lowest rates in America, typically .48 points lower than other lenders, which can help you offset the cost of MIP.
What are the different mortgage insurance premiums?
- Upfront MIP: This is a one-time payment made when you close on your loan. It’s often rolled into the loan itself, so you may not have to pay it out of pocket, but it will increase the total loan balance.
- Annual MIP: Paid monthly as part of your mortgage payment, this ongoing insurance premium protects the lender throughout the life of the loan.
- Does a borrower pay both? Yes, borrowers typically pay both upfront and annual MIP. The upfront MIP is due at closing, while the annual MIP is spread out over the life of the loan. Together, these premiums ensure the lender is protected in case of default, making them essential components of FHA loans.
Does MIP apply to all loans?
MIP is specific to FHA loans and plays a crucial role in making homeownership more accessible for buyers with smaller down payments, lower credit scores or higher DTI ratios.
If you’re getting a conventional loan, you’ll encounter PMI instead. Other government-backed loans, like VA loans, have different insurance requirements, such as a funding fee.
Why do MIP costs vary?
Several factors affect how much you’ll pay in MIP:
- Loan term: Loans with shorter terms (15-year FHA) typically have lower MIP rates compared to longer-term loans (30 year FHA).
- Down payment: The larger your down payment, the less risky your loan is, which can result in lower MIP premiums, which is why if you put 10% down or more then you’ll drop the MIP after 11 years.
- Loan amount: Higher loan amounts usually come with higher MIP costs, as the risk to the lender increases.
- Loan-to-value (LTV) ratio: If your LTV is above 90%, you’ll pay MIP for the entire term of the loan. If it’s below 90%, MIP may be cancellable after 11 years.
Can you cancel MIP?
In most cases, MIP can’t be removed like PMI. With FHA loans, you may be stuck with MIP for the life of the loan if your down payment was less than 10%. However, if you put down 10% or more, MIP could be removed after 11 years of payments. Refinancing into a conventional loan once you have more equity in your home is another way to get rid of MIP.
How long does it take to remove MIP?
Unlike PMI, where removal is more straightforward after you hit 20% equity, the removal of MIP can take longer due to the specific FHA rules. Refinancing into a conventional loan may be the quickest way to eliminate MIP, but that process could take several weeks to months, depending on your lender.
What documentation is needed for MIP removal?
If eligible for removal, you’ll need:
- A history of on-time mortgage payments
- Documentation showing you have reached the required level of equity
If you’re ready to start your journey to homeownership, get pre approved with Tomo Mortgage today.