Starting a mortgage is one of the biggest commitments you will ever make in your life. The majority of your monthly wage will be going towards this payment, so you want to make sure that you are using the right mortgage for you.
The trouble is, unless you are in the world of mortgage finances, all of the terms can be confusingly similar.
We want to make sure that you understand the difference between Mortgage Insurance Premiums and Private Mortgage Insurance because they are not the same thing despite their similar acronyms.
MIPs are federally backed loans; this means that the Federal Housing Administration (also known as FHA) is in charge of your mortgage.
MIP were designed to help first time buyers who have bad or low credit become homeowners. First-time buyers tend to be new to adulthood and so likely have low incomes; this means that they will have a hard time getting a mortgage without government help.
Mortgage Insurance Premiums have the best interest rates on the market, and they let these first-time borrowers make super low down payments, sometimes as low as 3.5%.
However, everything comes with a catch. Using an MIP means you are a high risk borrower. To make sure that the government doesn’t lose money while supporting you, they tend to make your borrowing period long, and there is little to no flexibility with the arrangement.
If you are not a low earner, a first-time homeowner, or struggling to get a mortgage, it would be best to avoid MIPs.
PMIs are the typical kind of mortgage insurance that you will find with a lender, but you tend to need a high credit or a high wage to pay for them.
Second homeowners, people climbing up the housing ladder, and high earners are the most likely to use Private Mortgage Insurance.
This is because they can pay extra and leave the contract early, they don’t need to pay an upfront cost, and the banks can see that they are financially secure enough to not need extra boundaries put in place.
However, the downside to all of this freedom is that the annual cost for the insurance is high. It ranges from 0.5% to 2% of the mortgage loan.
MIP and PMIs use different methods to determine their costs. MIPs look into 5 factors in general, whereas PMIs check out 2 factors.
MIP factors for monthly costs
The first things they need to weigh up before determining the premium costs are the down payments, the amount you are borrowing, and the length of time you are borrowing for.
Loan to Value Ratio (LTV)
You can cut down your monthly repayments by putting down a larger down payment; however, a large down payment might be tricky if you have a low income. The amount you give will help determine how much you will need to pay every month.
MIP down payments tend to be 3.5%, 5%, or 10% of the overall cost of your mortgage loan.
Amount Borrowed
If your mortgage loan is worth more than $625,000, then you will need to pay additional premium fees towards the insurance.
Term Length
If you need a long time to pay off the mortgage, then your MIP will be higher. 30 years is the average length of time needed to pay off the loan, so anything longer than this will be substantially more expensive.
Once the lender has determined these factors, they will then look at the two types of premiums you will be charged for. These are the upfront mortgage insurance premiums (UFMIP) and the annual premiums.
UFMIP
The lender will charge you an additional 1.75% of your loan when you close the account. For example, if your mortgage loan is worth £300,000, then you will have to pay an extra $5,250 when you close the insurance.
Annual Premiums
Your annual premiums will be determined by the first 3 factors (LTV, Amount, and Term Length); usually, the premium percentage is 1%.
If your mortgage loan is worth $300,000, then your annual premium will be worth $3,000 if you have a 1% loan. This means you will be charged $250 extra each month for the insurance.
PMI factors for monthly costs
PMIs don’t tend to look into a lot of detail when determining your costs. They tend to look at two factors in particular, and they both relate to your level of risk. The first factor is how much you earn, and the second factor is your credit history shown on your credit score.
Example of Costs
PMIs range from 0.5% to 2% of your total mortgage loan amount. Just like MIPs, they tend to be around 1%.
This means that a $300,000 loan will likely be $250 to your monthly payments. That being said, it can range from $100 to $500, depending on your credit score.
When to Pay
PMIs give you a lot of flexibility. You can choose to pay the insurer every month as standard, or you can opt for a single-premium mortgage where you pay a lump sum and the beginning or when closing your account.
You may prefer a quick and easy comparison between the two insurances. In that case, please see below.
Annual Costs
Mortgage Insurance Premiums are cheaper, with an annual cost of between 0.45% to 1.05% of the total mortgage loan.
Private Mortgage Insurance ranges between 0.5% to 2% of the total mortgage loan.
Types Of Loan
Mortgage Insurance Premiums are a government scheme, and therefore an FHA mortgage loan.
Private Mortgage Insurance is the traditional mortgage loan type.
Upfront Costs
Private Mortgage Insurance does not have an upfront cost.
To get a Mortgage Insurance Premium, you need to pay a fixed value of 1.75% of the total mortgage loan.
Years Required To Pay Off The Loan
Private Mortgage Insurance ends when you have either paid off 22% of the mortgage loan or when you have removed 20% of the home’s equity.
Mortgage Insurance Premiums last for the life of the mortgage loan. If you paid a 10% down payment, you could be released from the insurance after 11 years.
