It might be exciting to buy a house, but it can also be frustrating when you find terms like PMI and MIP in your loan papers. Both are kinds of mortgage insurance, but they only work with certain types of loans. Knowing the difference can save you a lot of money in the long run.
A lot of buyers get confused by these acronyms and don’t realize how much they change monthly payments and the ability to change loans. The good news is? It’s easy to tell which one pertains to your scenario if you know what each one represents.
This guide will explain PMI and MIP, what they are, how they function, and how to choose the one that best matches your home financing needs. By the end, you’ll know exactly what you’re paying for and how to save money while doing it.
What is Mortgage Insurance?
The lender utilizes it as a safety net so they don’t have to pay back the loan if the borrower doesn’t. It doesn’t protect you; it protects the lender. But it could help you buy a property with less than 20% down.
There are two main types:
- PMI (Private Mortgage Insurance) — tied to conventional loans.
- MIP (Mortgage Insurance Premium) — tied to FHA loans.
Both of them will make your monthly payment higher, but they work in different ways. Read on to learn about the regulations and the differences that matter.
Understanding PMI: Private Mortgage Insurance Explained
When you put down less than 20% on a conventional loan, you have to pay for private mortgage insurance (PMI). Conventional loans are the normal home loans that follow the rules set by Fannie Mae and Freddie Mac.
How Much Does a PMI Loan Cost?
PMI usually costs between 0.5% and 1% of the total loan amount each year; however, in exceptional situations, it can go up to 6%. There are a few things that will determine your exact rate:
- Credit score: Better credit equals lower PMI costs
- Down payment amount: The more you put down, the less you’ll pay
- Loan-to-value ratio: This compares your loan amount to the home’s value
- Debt-to-income ratio: Higher debt levels mean higher PMI
Let’s put some real figures on this. If you’re buying a $400,000 property with a 5% down payment, that would be $20,000. The amount of your loan is $380,000. If you have a PMI rate of 0.75%, you would pay:
$380,000 × 0.0075 = $2,850 per year, or about $237.50 per month
That’s about $2,400 more a year just for mortgage insurance. More than five years until you have 20% equity? That’s close to $12,000.
The Silver Lining: You Can Cancel PMI
You can get rid of PMI, which is a big plus. You can ask for cancellation after you have 20% equity in your home. Your lender has to cancel it automatically when you achieve 22% equity, which is based on the original value of your home.
You’ve got a few ways to speed up this process:
- Make extra payments toward your principal to build equity faster
- Get a new appraisal if your home value has increased significantly
- Refinance into a new loan once you have 20% equity
Understanding MIP: Mortgage Insurance Premium for FHA Loans
Mortgage insurance premium, or MIP, works in a different way. This only applies to FHA loans, which are government-backed mortgages that enable people with bad credit or modest down payments to buy homes.
The Double Whammy of MIP
Here’s where MIP gets tricky. You actually pay it twice:
Upfront MIP (UFMIP): A one-time fee of 1.75% of your loan amount that is usually added to your loan. That’s $6,650 more than what you owe on that same $380,000 loan.
Annual MIP: A cost that happens every year and is between 0.15% and 0.75% of your loan amount, paid in monthly installments.
If you want an FHA loan for less than $726,200 and put down less than 10%, your annual MIP will be 0.55%. In our example of $380,000:
$380,000 × 0.0055 = $2,090 per year, or about $174 per month
The Big MIP Problem: It Might Never Go Away
This is where the distinction between PMI and MIP becomes quite evident. When you reach 20% equity, MIP doesn’t instantly cancel like PMI does.
If you put down less than 10%, you’ll have MIP for the whole duration of your loan, which may be as long as 30 years. Put down 10% or more? For 11 years, you’ll have to pay MIP.
If you pay $174 a month for 30 years, you’ll end up paying $62,640 in MIP. With the $6,650 upfront fee, you’re looking at about $70,000 over the life of the loan.
PMI vs MIP: side-by-side at a glance
| Feature | PMI (conventional) | MIP (FHA) |
| Loan type | Conventional conforming loans | FHA-insured loans |
| Upfront fee | Usually none (unless single-premium PMI) | UFMIP ~1.75% (can be financed) |
| Annual rate | ~0.5%–1.5% (varies by credit & LTV). | 0.15%–0.75% (varies by loan and LTV). |
| Cancelable? | Yes — request at 80% LTV, auto at 78%. | No guarantee — may last 11 years or the life of the loan, depending on down payment and origination rules. |
| Best for | Buyers with higher credit scores who expect to build equity | Buyers with low down payments or lower credit who need looser underwriting |
Which Costs More: PMI or MIP?
At first glance, MIP rates may seem lower than PMI rates. But the 1.75% fee up front and the fact that you might have to pay it for the life of the loan can make MIP far more expensive in the long run.
If you have good credit (740 or higher), PMI on a conventional loan is usually the best option. If you have a low credit score or a very tiny down payment (3.5%), an FHA loan with MIP might be your only choice, or at least the easiest one to get.
Special note on MIP PMI disbursement
If you’re curious about MIP PMI distribution, you can pay UFMIP (the FHA upfront MIP) at closing or roll it into the loan (disbursed via the loan balance). Your loan servicer usually collects your PMI premium payments every month and sends them to the insurance company. In your loan estimate, ask your lender how the money will be sent to you.
Alternatives to PMI and MIP
Want to avoid mortgage insurance altogether? Here are your options:
VA Loans: Available to veterans and active military members who meet certain requirements. There is no down payment or mortgage insurance needed.
USDA Loans: For rural homes, there is no down payment and no standard mortgage insurance, but there is a guarantee charge.
Piggyback Loans: To reach that 20% goal, you can take out a second loan for 10% and put down 10% yourself.
Lender-Paid Mortgage Insurance: Your lender pays the PMI, but the interest rate is a little higher.
The A&P Lending Titans Approach
At A&P Lending Titans, we don’t believe in forcing you into a one-size-fits-all solution. We look at your whole financial situation—your credit score, down payment, income, and long-term goals—to help you decide if a PMI loan or an FHA loan with MIP is the best option for you.
We have helped many people in Las Vegas make these decisions, and we can explain everything in both English and Spanish. What’s important is getting you into the proper home with payments you can afford, not just now but for years to come.
Want to look into your mortgage alternatives and see if PMI or MIP is right for you? Call A&P Lending Titans at 702-277-4994 or come see us at 8495 W Sunset Rd Ste. 102, Las Vegas, NV 89113.
FAQs
Q: What is the main difference between PMI and MIP?
A: PMI (Private Mortgage Insurance) is for conventional loans and can be canceled once you reach 20% equity. MIP (Mortgage Insurance Premium) is for FHA loans, includes an upfront charge of 1.75%, and may last 11 years or the life of your loan, depending on your down payment.
Q: Can I avoid paying PMI or MIP entirely?
A: Yes. You can avoid both by putting 20% down on a regular loan or by choosing a VA or USDA loan, which doesn't require mortgage insurance. Some lenders also offer piggyback loans or mortgage insurance that the lender pays for.
Q: How long will I pay PMI on my conventional loan?
A: You will have to pay PMI until you have 20% equity in your house and ask for it to be canceled, or until your loan automatically reaches 22% equity. Depending on how much you put down and how quickly you pay off the principal, this usually takes 5 to 10 years.
Q: Is MIP tax-deductible?
A: The tax break for mortgage insurance premiums will end in 2025. Before, qualified taxpayers could deduct MIP and PMI expenditures; however, this is no longer possible under the new tax rules.
Q: What is a PMI loan?
A: A PMI loan isn't really a loan; it's a regular mortgage that needs private mortgage insurance because the borrower put down less than 20% of the home's value. People often use the term to talk about regular loans that come with PMI.
Q: What does MIP PMI disbursement mean?
A: MIP PMI disbursement is the process by which mortgage insurance payments are sent out and paid. Usually, this means that your lender collects your monthly mortgage insurance payment along with your principal and interest, and then sends it to the insurance company.
Q: Which is cheaper, PMI or MIP?
A: Your credit score and down payment will determine this. PMI on a conventional loan is normally cheaper for people with good credit (700 or higher), especially in the long run, because it can be canceled. MIP rates may be cheaper at first for borrowers with weaker credit ratings, but they may end up costing more over the life of the loan because they last longer.