MIP or PMI? The choice grows more difficult

MIP or PMI? The choice grows more difficult

mip or pmiWhich type of mortgage insurance is better for homebuyers and homeowners: one including a mortgage insurance premium (MIP) or one with private mortgage insurance (PMI)?

The answer isn’t easy.

FHA or conventional loan

Mortgage insurance may be required when a buyer doesn’t have a 20% downpayment or a homeowner wants to refinance with less than 20% equity.

Borrowers who need mortgage insurance may have a choice of two types of loans:

  1. A loan insured by the Federal Housing Administration (FHA) with an MIP.
  2. A conforming loan with PMI.

Both options enable the borrower to get a loan without cash for 20% of the purchase price. Beyond that, though, the two options have different costs for borrowers.

How much does MIP cost?

According to the U.S. Department of Housing and Urban Development, the annual MIP for most new FHA loans ranges from 0.45 percent to 1.05 percent of the loan amount.

The exact cost within that range depends on the loan size, loan term and loan-to-value (LTV) ratio. For loans with a term of 15 years or shorter, MIP ranges from 0.45 percent to 0.95 percent. For loans with a longer term, MIP ranges from .80 percent to 1.05 percent.

Loans for more than $625,500 generally have a slightly higher annual MIP than those with smaller loans.

MIP is paid monthly with the borrower’s mortgage payment. Whether or not borrowers can stop paying MIP depends on when they applied for their loan, their loan’s initial term and their initial down-payment. In some cases, MIP can be cancelled. In others, it is required for the life of the loan.

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Like MIP, PMI costs range widely depending on the loan size, loan term and LTV, the borrower’s credit score and other factors.

Comparing MIP to PMI

“PMI can sometimes be avoided with a conventional loan, however, there is no way to avoid MIP with an FHA loan,” says Matt Hackett, operations manager at Equity Now, a direct mortgage lender in New York City.

Changes to MIP in the past few years have made PMI “the way to go for most borrowers,” advises Ryan Leahy, sales manager at Mortgage Network in Danvers, Mass.

One reason is that the FHA loan with MIP also has an upfront mortgage insurance premium. This cost equals 1.75% of the loan amount, or $1,750 per $100,000, for most new FHA loans. Borrowers must pay the upfront MIP in addition to the annual MIP.

“With PMI, you only have a monthly fee,” Leahy explains.

Another reason why PMI may be better is that it can be cancelled when the borrower builds up enough equity in the home. MIP is more likely to be required for the life of the loan.

“To get out of MIP, you would have to refinance out of the FHA loan and into a new loan,” Leahy notes.

Individual mortgage loan decision

The bottom line is that the MIP or PMI decision is “truly case by case,” says Richard Pisnoy, principal and mortgage loan originator at Silver Fin Capital Group, a mortgage company in Great Neck, N.Y.

The chart below shows the FHA’s MIP cancellation policy.

Term

LTV (%)

Loans secured before 6/3/2013

Loans secured on/after 6/3/2013

≤ 15 yrs

≤ 78

No annual MIP

11 years

≤ 15 yrs

> 78 – 90.00

Cancelled at 78% LTV

11 years

≤ 15 yrs

> 90.00

Cancelled at 78% LTV

Loan term

> 15 yrs

≤ 78

5 years

11 years

> 15 yrs

> 78 – 90.00

Cancelled at 78% LTV & 5 yrs

11 years

> 15 yrs

> 90.00

Cancelled at 78% LTV & 5 yrs

Loan term

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The inability to cancel FHA mortgage insurance as quickly doesn’t affect whether you can qualify for a loan, but will make your loan more costly over the long-term.

The only way to choose wisely is to crunch the numbers. You can start by plugging some figures into HSH.com’s mortgage calculator or PMI cost calculators. You should also consult a mortgage professional to compare these loan products based on your personal financial situation.

That increased insurance cost might prompt more borrowers to choose a conforming loan instead of an FHA loan, says Julian Hebron, mortgage consultant at RPM Mortgage, a mortgage company in San Francisco.

While FHA mortgage rates typically are lower than conforming mortgage rates, a conforming loan could turn out to be cheaper than an FHA loan since PMI can be canceled sooner, Hebron says.

“It’s at the discretion of the servicer as to when the PMI goes away, but traditionally it’s between two and three years that you’re eligible for review, if you’ve achieved 22 percent equity by pay-down,” Hebron says.

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