MIP, MMI, and the FHA: Insurance on a Low Down Payment Mortgage
In a previous post about PMI, or private mortgage insurance, we discussed how lenders protect their interest in the home you are buying and the money they are lending, by charging you a small premium to insure the difference between your low down payment and the benchmark 20% down payment. But that is for a conventional loan.
Shuffle the letters around a bit, and new acronym appears doing basically the same thing. MIP, or mortgage insurance protection, also referred to as MMI, or monthly mortgage insurance is used by the federal government to insure your low down payment loan issued through the FHA. Confused yet? Let’s try to clear this up a bit because they are essentially the same and do many of the same functions and yet, they have some significant differences that are worth noting.
What is the difference between PMI and MIP?
Because the FHA does not lend money, but instead guarantees a portion of the loan will be repaid to the lender should anything happen, it acts as an insurer. To cover those costs, they charge the borrower a small fee in order to acquire a mortgage with less than the benchmark standard of 20% down. (PMI does essentially the same thing but there is no government involvement, hence the private in PMI.)
Why is MIP important?
Because many people have difficulty coming up the required 20% down or maintaining the best credit score, The FHA has stepped in and made a promise to lenders in the form of this self- insured mortgage protection.
Can MIP be eliminated?
Because of rule changes made by the FHA, MIP can be dropped after five years or when your mortgage drops to 78% of the purchase price of the home. In simple math: If the house costs $100,000, the mortgage will need reach $78,000 in order to petition the lender to drop the MIP payment. The borrower could also pay down the loan sooner to lower the balance.
One thing to note: FHA does not permit an appraisal to eliminate the MIP payment before the five year window expires. If you feel as though the change is significant enough, explore a conventional mortgage.
How much does MIP cost?
There is the standard 1.75% of the loan value, which is paid upfront, and usually rolled into the mortgage. The monthly rate will be determined by the loan to value but you can comfortably expect it to be 1.35% annually.
Can MIP be avoided?
If you are using an FHA loan to purchase a house, probably not. If you had excellent credit and 20% down, you would not be applying for this type of loan. Some lenders might be willing to offer a higher interest rate instead of the mortgage insurance. You could also consider borrowing the down payment, sometimes referred to as a piggyback loan. Veteran or VA loans do not carry MIP, MMI, or PMI costs.
How can we assist you today?
On behalf of The Jones Group @ Sunriver Realty
Nola Horton-Jones, Principal Broker/Realtor | ABR, C-RIS, e-PRO, GREEN, RSPS, CCIM Candidate
Bryce Jones, Broker/Realtor | ABR, CRS, e-PRO, GREEN, GRI, RSPS, SFR
Karen Marcy, Broker/Realtor
The Jones Group @ Sunriver Realty | 57057 Beaver Drive | Sunriver, OR 97707
Mobile: 541-420- 3725 | Mobile: 541-420- 4018 | Mobile: 503-327- 9611 | Fax: 541-593- 5123
Licensed in Oregon