Buying A Home? What To Know About PMI And MIP

14 November 2017
 Categories: Real Estate, Blog

Are you in the market to buy a home? Chances are, you will need financing in order to afford it. However, you'll be paying more than just the monthly mortgage in some situations. You could may need to pay private mortgage insurance or a mortgage insurance premium, otherwise known as PMI and MIP respectively. Here is what you need to know about these additional fees.

Mortgage Insurance Premiums

When a lender issues an FHA loan, which is a federal government backed loan, they will charge a MIP fee to go with it. MIP is essentially a form of insurance to protect your lender if you were not able to pay for your mortgage, since the lender is able to get their money back and wouldn't not lose anything in the deal.

MIP consists of two different fees. One is paid when you initially get your loan, and then there will be a fee every month for the duration of your loan. The first fee for signing up (1.75%) is based off a percentage of how much money you will be borrowing, not the price of the house. The monthly fee (.85%) is also based off your loan amount, but spread across all 12 payments.

Private Mortgage Insurance

Lenders also charge PMI for conventional loans when the borrower does not have a large enough down payment for the home for sale. This insurance also protects the mortgage lender if you were to not make your mortgage payments. The big difference is that you can avoid paying PMI by providing a down payment worth 20% of the home's value. PMI fees can also be removed one you've paid off 20% of the home, or do enough to increase the home's value where your remaining home value is now less than 80% of the home.

Avoiding The Fees

Avoiding these fees may seem simple, but it involves you having your finances and credit in order to do so. For instance, having a good credit history will help you avoid MIP by qualifying for a conventional loan instead of a federally backed FHA loan. Having 20% of the home's value for a down payment will help you avoid PMI.

For help understanding these two fees when buying a home that is for sale, speak to your real estate agent. They can provide you with more advice that can help you avoid those fees that increase your monthly housing costs.