MIP or PMI? The choice grows more difficult

If a potential homebuyer can only make a down payment less than 20% of the purchase price, or a homeowner wants to refinance but has less than a 20% equity stake, which type of mortgage is better: One that includes a mortgage insurance premium (MIP) or one that carries private mortgage insurance (PMI)?

The answer isn't simple.

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 MIP.
2. A conventional conforming loan with PMI.

Both options enable the borrower to get a loan without enough funds or equity to cover 20% of the purchase price or home value. Beyond that, though, the two options have different costs for borrowers.

How much does the FHA's MIP cost?

According to the U.S. Department of Housing and Urban Development, the annual MIP for most new FHA loans ranges from 0.15 percent to 0.75 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 0.15 percent to 0.65 percent. For loans with a longer term, MIP ranges from 0.55 percent to 0.75 percent.

Loans for more than $726,200 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 canceled. In others, it is required for the life of the loan.

Like MIP, PMI costs range widely, and depend 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 ($1,750 per $100,000) for most new FHA loans. Borrowers must pay the upfront MIP in addition to the annual MIP. However, FHA allows the upfront fee to be included into the loan amount, so it may not need to be paid out-of-pocket.

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

Another reason why PMI may be better is that it can be canceled 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.

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.

Older Loans, Newer Loans: FHA MIP cancellation policy

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

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.

MIP or PMI: Calculating costs

The only way to choose wisely is to crunch the numbers. HSH's FHA MIP calculator can show you side-by-side comparisons of MIP vs. PMI costs for a range of downpayments and credit scores. You can also plug some figures into HSH.com's PMI cost calculator. It may also be helpful to discuss costs and tradeoffs with a mortgage lender to see how either option might fit your personal financial situation.

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.

However, since FHA does not increase rates for borrowers with weaker credit scores, an FHA loan might work best for a borrower with both a small down payment and a less-than-stellar FICO score. Even though the MIP can't be canceled, a homeowner can always refinance out of the FHA program at some later point when mortgage insurance costs are no longer a factor.

While many FHA borrowers won't be able to cancel their MIP, it's not always a near-term occurrence with PMI, either. "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.

You can learn more about PMI by reading HSH's comprehensive "Guide to Private Mortgage Insurance (PMI)".