What is mortgage insurance premium (MIP)?
A mortgage insurance premium (MIP) is a type of insurance applied to mortgage loans insured by the Federal Housing Administration, also known as an FHA loan. These FHA loans, provided by FHA-approved lenders, are popular options for homebuyers who may not have the financial means to make large down payments or meet high credit requirements for a conventional mortgage. Because of this, the lender may require the borrower to pay MIP. So, let’s answer the question, “What is a mortgage insurance premium?” and look at how it works, how much it costs and whether you can cancel your MIP payments.
Why do FHA loans require MIP?
MIP is essentially a type of insurance that protects the lender if the borrower defaults on the FHA loan. It’s required because the FHA allows approved lenders to provide lower down payment requirements and more flexible credit qualifying requirements compared to most conventional loans. The MIP is an additional amount added to the mortgage payment. By providing this type of insurance, the FHA is able to encourage lenders to provide more options to a wider range of borrowers.
How much is MIP on an FHA loan?
When determining how much mortgage insurance premiums are, it’s worth noting that there are two types of MIP: Upfront MIP and annual MIP. The upfront MIP is a percentage of the base loan amount and can be paid as a lump sum at the closing of the loan or financed into the total loan balance and paid for as part of your monthly payments. The annual MIP that’s paid on a monthly basis is calculated based on the loan amount, the loan-to-value ratio and the loan term, and it can vary depending on these factors.
It’s important for borrowers to understand their MIP obligations and to factor these costs into their overall budget when considering an FHA loan.
Are mortgage insurance premiums deductible?
Whether mortgage insurances premiums are deductible or not depends on various factors, including current legislation. Checking with a qualified tax professional when filing your own taxes can help determine whether an MIP deduction is available and what your own individual eligibility is.
Does MIP go away?
Many borrowers wonder whether they’ll have to pay the annual Mortgage Insurance Premium (MIP) on their FHA loan forever. The answer is that it may be possible for annual MIP costs to fall off automatically in certain circumstances. In other cases, you may be able to request cancellation. Check with your lender for more detailed information on how MIP can be removed.
If you closed on a loan and had applied for it before June 3, 2013, your annual MIP may cease when your loan-to-value (LTV) ratio is at least 78%.
For FHA loans closed with an application date on or after June 3, 2013, your annual MIP costs may automatically end after 11 years, as long as you made a minimum down payment of 10% or more.
If you put down less than 10% upfront for an FHA loan closed on or after June 3, 2013, you may be required to pay MIP for the full loan term. If you don’t meet any of the requirements to cancel your annual MIP, you may be able to refinance your FHA loan into a conventional mortgage.
Upfront and annual mortgage insurance premiums are a special type of mortgage insurance that is automatically applied to FHA loans. Some annual MIP insurance may fall off automatically under certain circumstances. Understanding the details of mortgage insurance premiums can help you make an informed decision about your own financing options and whether FHA loans are right for you.