There are two main types of mortgage insurance: Private mortgage insurance (PMI), which covers private loans, and mortgage insurance premium (MIP), which covers government loans.

You might be required to get insurance as a condition of your mortgage, or you might be considering getting mortgage insurance to lower the required down payment on your house. Either way, it is a good idea to understand the different types of mortgage insurance.

Luckily, the

insurance

broker app

Jerry

is here to walk you through everything you need to know! Let’s take a look at these two types of insurance, what makes them different, and which one might be right for you.

Let Jerry find your price in only 45 seconds

No spam · No long forms · No fees

Find insurance savings

What are PMI and MIP?

There are two main types of mortgage insurance: private mortgage insurance (PMI) and mortgage insurance premium (MIP).

MIP is insurance for government-backed loans, and it is mostly used to insure mortgages from the Federal Housing Administration (FHA). If you have an FHA mortgage, you will automatically be required to get MIP coverage.

PMI is similar to MIP except that it insures private loans. This is the type of coverage you would get to cover a conventional mortgage from a bank or credit union. Conventional mortgages may or may not require you to get PMI coverage, and it generally depends on your credit score and the size of your down payment.

What is mortgage insurance?

Before we get into the differences between MIP and PMI coverage, let’s cover what mortgage insurance actually is.

Mortgage insurance is a type of coverage that protects lenders from financial loss. It also helps customers get loans when they otherwise would not qualify.

Because of the risk lenders take on when granting a mortgage, they have to be careful to whom they make an offer. Lenders have numerous requirements that prospective borrowers have to meet before they qualify for a mortgage. Unfortunately, these precautions also prevent a lot of people from being able to afford houses.

Mortgage insurance allows you to pay a monthly insurance premium as part of your mortgage payment. If you then default on your mortgage, the insurance policy will cover the lender’s financial losses. This lessens the risk for the lender and allows them to offer mortgages more freely.

With mortgage insurance, you can secure a loan you otherwise couldn’t get approved for. It also means you can pay a smaller down payment than you would otherwise need to. Most mortgages require a down payment of at least 20%. With mortgage insurance, you could end up paying as little as 3% down.

Some lenders, including the FHA, require mortgage insurance as a condition of your loan.

Key Takeaway: Mortgage insurance protects lenders if you fail to pay back your mortgage. It does not protect you in any way, but it does help you get approved for mortgage loans more easily.

MORE: Home insurance terms you need to know

How are MIP and PMI different?

The main difference between PMI and MIP is the type of loan they insure, but there are a few other key differences to consider:

Cancelation

MIP coverage typically cannot be canceled unless you made an unusually large down payment or you refinance your loan.

PMI coverage, on the other hand, can be canceled once you reach 20% equity in your house.

Upfront cost

Both MIP and PMI have annual premiums which are divided between your monthly payments each year.

However, MIP also has an upfront mortgage insurance premium or UFMIP. The UFMIP is a single payment equal to 1.75% of the total loan amount. It must either be paid in full when you close on your house or be financed into the loan amount.

Annual insurance premiums

Annual premiums for MIP coverage will always be between 0.45% and 1.05% each year. Your exact premium will depend on the size of your loan, the size of your down payment, and the term of your loan.

Premiums for PMI tend to be a bit higher, usually ranging from about 0.6% to 1.9%. Again, the exact rate will depend on your mortgage term, loan amount, and the size of your down payment.

What are the pros and cons of MIP?

MIP coverage can be a more affordable option for a lot of homeowners, but it does have some drawbacks.

Pros of MIP coverage

FHA loans and the corresponding MIP coverage are much easier to qualify for if you have poor credit or a high debt-to-income (DTI) ratio. This is particularly helpful for first-time homebuyers and people with low incomes.

MIP coverage is usually cheaper for people with poor credit

Allows homebuyers to secure a loan with down payments as low as 5%

Cons of MIP coverage

MIP coverage has two premiums you’ll have to pay, the annual premium, and the upfront mortgage insurance premium (UFMIP)

Unless you made a down payment of 10% or more, your MIP coverage cannot be canceled. You’ll have to pay the insurance premiums for the entire term of the mortgage or until you refinance your loan

MIP coverage can actually be more expensive for homebuyers with good credit

What are the pros on cons of PMI?

PMI coverage for private loans has its own set of drawbacks and advantages.

Pros of PMI coverage

PMI coverage can often be cheaper for homebuyers with good credit who can afford to make a large down payment

Unlike MIP, PMI does not have an upfront premium

You can request to have PMI coverage removed from your mortgage once you reach 20% equity in your home, meaning you have paid off enough of the loan to own 20% of your home outright

Allows homebuyers to secure a loan with down payments as low as 3%

Cons of PMI coverage

PMI coverage can be more expensive for people with low credit

PMI coverage is more difficult to qualify for than MIP coverage

MORE: Home insurance liability coverage

Which one should you choose?

You can figure out if you need MIP or PMI coverage when you apply for a mortgage as the type of loan will dictate the mortgage insurance coverage.

FHA loans (and their corresponding MIP coverage) are typically better for homebuyers with poor credit and/or limited savings to put toward a down payment. First-time homebuyers and individuals with low income might want to consider an FHA loan.

Conventional loans tend to be more advantageous for homebuyers with good credit and the ability to make a relatively large down payment.

How you can save on homeowners insurance?

Conventional mortgages and FHA mortgages will both usually require you to purchase homeowners insurance as a condition of your mortgage.

Homeowners insurance is different than mortgage insurance. Whereas mortgage insurance covers the lender’s financial risk, homeowners insurance will pay for damages to your home. Even if homeowner’s insurance isn’t required for your mortgage, it is still a very good idea to purchase some.

The best way to save money on homeowner’s insurance is to bundle it with your auto insurance and use the free insurance broker app

Jerry

to compare quotes from the top insurance providers in just seconds!

“Jerry was wonderful! I used it for my auto and renters policies. I trusted it so much that I signed up my homeowners insurance under Jerry as well. All of the agents are amazingly nice and knowledgeable.” —Mary Y.

FAQs

What is the difference between PMI and MIP?

MIP is mortgage insurance for government-back loans which can be helpful for homebuyers with poor credit and limited savings.

PMI is mortgage insurance for private sector loans which is usually better for homebuyers with good credit and solid financials.

Can I cancel my mortgage insurance?

You may or may not be able to cancel your mortgage insurance. It depends on a few factors:

If you have MIP insurance, you cannot cancel it unless you paid 10% or more of your house’s value in your down payment.

If you have PMI insurance, you can cancel your coverage after you own 20% equity in your home. Once you reach 22% equity, PMI coverage will be canceled automatically.

Save an average of 18% by bundling your home and auto insurance

Bundle your home and auto insurance with Jerry and save!

Try Jerry