What is Mortgage Insurance Premium?

Mortgage Insurance Premium (MIP) is a monthly fee that borrowers in the United States pay to the Federal Housing Administration (FHA) to protect lenders against losses that may arise if borrowers default on their mortgage loans. The fee is in addition to the principal, interest, taxes, and insurance that borrowers pay on their mortgage loans.

History of Mortgage Insurance Premium

The FHA introduced MIP in 1934 as part of its mission to make homeownership more accessible to low- and moderate-income Americans. The MIP was designed to provide lenders with an insurance policy against borrower default, which would allow them to lend to borrowers who may not have been able to qualify for a mortgage otherwise.

Initially, the premium was only charged as an upfront fee, but in 2001, the FHA began charging an annual fee as well. The annual fee is divided into 12 equal installments and added to the borrower’s monthly mortgage payment.

MIP vs. Private Mortgage Insurance (PMI)

It is important to note that MIP is different from Private Mortgage Insurance (PMI), which is required on most conventional loans that are not insured by the FHA. PMI is also a fee that borrowers pay to protect lenders against losses, but it is paid to private companies rather than to the government.

Rather than charging an upfront and annual fee, PMI is typically calculated as a percentage of the borrower’s loan amount and added to their monthly mortgage payment. The percentage may vary depending on the borrower’s credit score and the size of their down payment.

How is Mortgage Insurance Premium Calculated?

The amount of MIP that a borrower pays is determined by the size of their down payment and the term of their loan. The larger the down payment, the lower the MIP rate.

The MIP rate also varies based on the term of the loan. For loans with terms of 15 years or less and loan-to-value ratios of less than or equal to 90%, the MIP rate is 0.45%. For loans with terms longer than 15 years and loan-to-value ratios of less than or equal to 95%, the MIP rate is 0.80%. For loans with terms longer than 15 years and loan-to-value ratios greater than 95%, the MIP rate is 1.05%.

It is important to note that MIP rates can change over time, depending on the policies of the FHA and the Department of Housing and Urban Development (HUD). However, once a borrower has closed on their loan, their MIP rate cannot change for the life of the loan.

FAQ

1. Is Mortgage Insurance Premium tax deductible?

Yes, in most cases, MIP is tax deductible for borrowers who itemize their deductions on their federal income tax return. However, the deductible amount may be subject to certain limitations and restrictions, so it is important for borrowers to consult with a tax professional to determine their eligibility for the deduction.

2. When does Mortgage Insurance Premium end?

The duration of MIP depends on the type of loan that a borrower has. For most FHA loans, MIP must be paid for the life of the loan, or until the borrower refinances or sells their home. However, borrowers who have loans that were originated before June 2013 and who have made a down payment of at least 10% may be eligible to have their MIP cancelled after 11 years.

3. Can I avoid paying Mortgage Insurance Premium?

In general, borrowers who make a down payment of less than 20% of the home’s purchase price are required to pay MIP. However, there are some ways that borrowers may be able to avoid paying MIP. One option is to obtain a conventional loan rather than an FHA-insured loan, as these loans do not require MIP.

Another option is to make a larger down payment. If a borrower can make a down payment of 20% or more, they will not be required to pay MIP. However, making a larger down payment may not be feasible for all borrowers, especially those who are purchasing their first home or who have limited cash reserves.

4. Can I get a refund if I cancel my Mortgage Insurance Premium?

Yes, if a borrower is eligible to have their MIP cancelled, they may be entitled to a refund of any unearned premiums that they have paid. However, the amount of the refund will depend on the timing of the cancellation, the amount of the premiums that have been paid, and the reason for the cancellation.