Private Mortgage Insurance (PMI) and Mortgage Insurance Premium (MIP) have the same purpose of protecting lenders against default or foreclosure. For lenders, a borrower providing less than 20% down payment poses a higher risk of nonpayment. To offset this risk, lenders require mortgage insurance.
Although PMI and MIP have the same goal, they have significant differences.
PMI, or Private Mortgage Insurance, applies to conventional loans. The rate for PMI can range from 0.5% to 2% of the loan amount. This amount can be paid as a lump sum upon closing or incorporated into the monthly payments.
PMI automatically drops off when your mortgage balance reaches 78% of the purchase price or when you reach the midpoint of the amortization period. You can also request to cancel PMI once your equity in the home reaches 20%, assuming that you have a good payment history.
On the other hand, MIP or Mortgage Insurance Premium applies to FHA loans. MIP has two components: upfront premium (also known as UFMIP) and annual premium. UFMIP currently costs 1.75% of the loan amount and has to be paid upfront upon closing. The annual MIP is usually 0.85% on most FHA loans.
Unlike PMI, MIP does not automatically fall off. But there are two ways to get rid of it. One, you can request a cancellation when you have paid 5 years in a 30-year loan, and your loan balance is at or below 78%. Two, you can refinance to a different loan program once you reach 20% equity on the home.