PMI vs. MIP: What’s the Difference?

What Is Private Mortgage Insurance (PMI) for Conventional Loans?

Private mortgage insurance applies only to conventional loans rather than government-backed loans (such as 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 loan defaults.

For example, if you’re buying a home with a conventional mortgage and making a 10% down payment, you’ll have to pay 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 to meet conventional loan guidelines.

PMI is typically paid as part of your monthly mortgage payment, though some loans allow for upfront payments. The cost depends on factors such as 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.

What Are Mortgage Insurance Premiums (MIP) for FHA Loans?

MIP is required on all FHA loans and protects the FHA if the loan defaults. 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 limited down payment funds (because it allows them to qualify for a mortgage), but there are downsides to consider.

Difference Between PMI and MIP Costs and Removal Rules

Now that you understand the basics of PMI and MIP, the next step is to compare their costs and long-term impacts. The amount you'll pay—and how long you'll pay it—can vary significantly depending on whether you choose a conventional or FHA loan.

Upfront Costs

One of the biggest differences between PMI and MIP is that FHA loans require an upfront mortgage insurance premium. Most FHA borrowers pay an upfront MIP (UFMIP) equal to 1.75% of the loan amount as part of their closing costs, though this cost can be rolled into the loan. Conventional loans with PMI don’t require an upfront mortgage insurance charge.

Monthly Mortgage Insurance Costs

Both PMI and MIP usually involve monthly payments, but the costs are calculated differently. PMI rates vary based on factors such as your credit score, down payment amount, and loan size, while FHA MIP rates are set by the government and depend primarily on the loan amount, loan term, and down payment. Depending on your financial profile, PMI may cost less than MIP, particularly for borrowers with strong credit.

How Long You'll Pay Mortgage Insurance

PMI is temporary and can be removed once you reach 20% home equity, at which point you can request that your lender remove it. Once you reach 22% equity, PMI is automatically removed. 

FHA mortgage insurance often lasts longer. Depending on your down payment, MIP may remain in place for 11 years or for the life of the loan. Because of these differences, it's important to consider not only the monthly cost of mortgage insurance but also how long you'll be required to pay it.

The process to remove PMI from your mortgage is also much simpler than removing MIP. To remove MIP, you typically have to refinance an FHA loan into a conventional loan.

Mortgage Insurance for VA Loans and USDA Loans

VA loans and USDA loans don’t require mortgage insurance because they charge fees that help fund the mortgage programs. When you finance a home with a VA loan, you’ll need to pay a one-time VA funding fee (which can be paid at closing or rolled into the loan). VA-recognized disabled veterans and some surviving spouses are exempt from paying the VA funding 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 the option to remove it once you reach sufficient equity in your home. In comparison, MIP is included with FHA loans and comes with upfront and ongoing costs.

Comparing your loan terms, interest rates, and mortgage insurance requirements will help you save - money and choose a mortgage that fits your financial situation. When you’re ready to explore your options, get prequalified today with Freedom Mortgage to see your personalized loan offers.