Definition:
Mortgage Insurance Premium (MIP) is a type of mortgage insurance required on all FHA (Federal Housing Administration) loans. It protects the lender if the borrower defaults on the loan.
Example:
Carlos buys a $250,000 home using an FHA loan. He puts down 3.5%, so his lender adds a Mortgage Insurance Premium to his loan. Carlos pays an upfront MIP at closing and a monthly MIP as part of his mortgage payment.
Explanation:
FHA loans are government-backed loans designed to help buyers with smaller down payments or lower credit scores. To reduce the risk for lenders, the FHA requires borrowers to pay MIP.
There are two parts to MIP:
- Upfront MIP (UFMIP) – A one-time fee paid at closing, usually 1.75% of the loan amount. It can be paid in cash or rolled into the loan.
- Annual MIP – Paid monthly as part of the mortgage payment. The amount depends on the loan size, down payment, and loan term.
For example, if a borrower takes out a $200,000 FHA loan, they’ll pay $3,500 upfront (1.75%) and then continue to pay monthly MIP, which could be around 0.55% to 1.05% annually, depending on the loan details.
Unlike private mortgage insurance (PMI) on conventional loans, MIP often stays for the life of the loan unless the borrower puts down 10% or more, in which case it can be removed after 11 years.
Why is Mortgage Insurance Premium (MIP) Important in Real Estate Transactions?
MIP is important because it makes FHA loans possible for buyers who don’t qualify for conventional financing. For buyers, understanding MIP helps in planning for monthly costs. For sellers, it expands the buyer pool. MIP plays a key role in making homeownership more accessible.