Mortgage Insurance: PMI and MIP Explained by Coventry Enterprises of America

Mortgage insurance protects the lender, not the borrower, in case of default. Despite paying for it, borrowers receive no direct benefit. Understanding when it is required and how to eliminate it as quickly as possible is important for managing the long-term cost of homeownership. Coventry Enterprises of America explains PMI and FHA MIP clearly.

Private Mortgage Insurance (PMI)

PMI is required on conventional loans when the down payment is less than 20 percent of the purchase price. The cost typically ranges from 0.5 to 1.5 percent of the loan amount annually, paid as part of your monthly mortgage payment. On a $280,000 loan, PMI could add $116 to $350 per month to your payment.

Federal law (the Homeowners Protection Act) gives you the right to request PMI cancellation when your loan balance reaches 80 percent of the original purchase price. Your lender must automatically cancel PMI when the balance reaches 78 percent of the original value. You do not need to refinance to eliminate PMI; you simply need to reach those equity thresholds, which you can request be verified with a new appraisal if your home's value has increased.

FHA Mortgage Insurance Premiums (MIP)

FHA loans carry two types of mortgage insurance. The upfront MIP is 1.75 percent of the loan amount, typically financed into the loan balance. The annual MIP ranges from 0.15 to 0.75 percent of the remaining balance, paid monthly. For FHA loans with less than 10 percent down, the annual MIP lasts for the life of the loan, regardless of how much equity you build.

The only way to eliminate FHA MIP on a low-down-payment loan is to refinance into a conventional loan once you have at least 20 percent equity. This is worth calculating explicitly: at what point does the equity threshold for conventional refinancing arrive, and does the rate available at that point make the switch financially worthwhile?

Lender-Paid PMI

Some lenders offer lender-paid PMI, where the cost is embedded in the interest rate rather than charged as a separate monthly premium. The monthly payment may be lower because there is no explicit PMI line item, but the higher rate applies for the entire loan term. Unlike borrower-paid PMI, lender-paid PMI cannot be canceled when you reach 20 percent equity. For long-term owners, borrower-paid PMI is almost always less expensive in total.