Mortgage Insurance Premium (MIP)
Mortgage insurance premium (MIP) is the insurance charge required on FHA-backed loans. MIP consists of an upfront premium paid at closing and an annual premium paid monthly, protecting the FHA against borrower default regardless of down payment amount.
What This Means
Upfront and Annual Components
FHA MIP has two components. The upfront mortgage insurance premium (UFMIP) is 1.75% of the base loan amount , due at closing but typically financed into the loan balance. The annual MIP is paid in monthly installments and varies based on the loan term, LTV ratio, and loan amount. For most 30-year FHA loans with LTV above 95%, the annual MIP rate is 0.55% .
How MIP Differs from PMI
Unlike conventional PMI, FHA MIP applies to all FHA loans regardless of down payment size. A borrower putting 20% down on an FHA loan still pays MIP. Key differences include:
- Duration: For loans with LTV above 90% at origination, MIP remains for the life of the loan . Loans at or below 90% LTV require MIP for 11 years.
- Cost basis: MIP rates are set by FHA and apply uniformly based on loan parameters, while PMI rates vary by insurer and borrower credit profile.
- Cancellation: Unlike PMI, MIP on most current FHA loans cannot be cancelled without refinancing into a conventional loan.
Financial Impact
The combination of UFMIP and annual MIP adds measurably to FHA loan costs. On a $300,000 loan, the UFMIP adds $5,250 to the loan balance , and the annual premium at 0.55% adds approximately $137.50 per month . These costs are a primary reason borrowers with sufficient credit and savings may prefer conventional financing with PMI, which can be removed at 80% LTV.