If you’re considering an FHA loan, understanding Mortgage Insurance Premium (MIP) is essential. Unlike conventional loans, which only require private mortgage insurance (PMI) if you put down less than 20%, FHA loans require MIP for all borrowers, regardless of down payment size. This guide breaks down what MIP is, how much it costs, and how you can remove it.
What Is Mortgage Insurance Premium (MIP)?
MIP is a required fee for FHA loan borrowers, designed to protect lenders in case of default. Since FHA loans allow low down payments (as little as 3.5%) and lower credit scores, mortgage insurance reduces lender risk.
MIP vs. PMI: What’s the Difference?
- PMI (Private Mortgage Insurance) applies to conventional loans and can be removed once you reach 20% home equity.
- MIP (Mortgage Insurance Premium) has different cancellation rules based on when your loan originated and how much you put down.
How Much Does MIP Cost?
FHA loans require two types of MIP payments:
1. Upfront Mortgage Insurance Premium (UFMIP)
- 1.75% of the loan amount
- Paid at closing (can be rolled into the loan)
2. Annual Mortgage Insurance Premium (MIP)
- 0.15% – 0.75% of the loan amount per year
- Included in monthly mortgage payments
- Based on loan amount, term length, and loan-to-value (LTV) ratio
Example:
For a $200,000 FHA loan:
- UFMIP: $3,500 (1.75% of loan amount)
- Annual MIP: 0.55% – 0.75%, adding $92–$125 per month to your mortgage
How to Remove MIP on an FHA Loan
Whether you can cancel MIP depends on when your loan originated:
- Before June 3, 2013: MIP can be removed once you reach 78% LTV (or after five years of payments).
- On or after June 3, 2013:
- 10%+ Down Payment: MIP lasts for 11 years.
- Less than 10% Down Payment: MIP lasts for the life of the loan unless refinanced into a conventional mortgage.
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The Only Way to Eliminate MIP Completely
The best way to remove MIP permanently is to refinance into a conventional loan once you have at least 20% equity in your home.
FHA vs. Conventional Loans: Which Is Better?
FHA loans provide lower credit score requirements and smaller down payments, making homeownership more accessible. However, MIP costs add up over time. If you qualify for a conventional loan, you can avoid MIP entirelywith 20% down.
Which Loan Is Right for You?
FHA Loan: Best for lower credit scores or small down payments
Conventional Loan: Best for avoiding mortgage insurance with 20% down
Plan for MIP in Your Mortgage Budget
When budgeting for an FHA loan, include MIP costs in your calculations. While MIP may be unavoidable upfront, knowing when and how to remove it can help you save money in the long run.
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