PMI vs MIP - What are they and how are they different?

Private Mortgage insurance (PMI) and Mortgage Insurance Premium (MIP) have the same purpose. They are insurance that protect the lender in case the borrower defaults on their mortgage. If a borrower defaults, the PJMI or MIP will payout a portion of the outstanding loan to minimize the losses to the lender. Having PMI or MIP is what helped lower the minimum required down payment all the way to 3% and helps enable more people to realize the dream of homeownership.

PMI is required on any conventional mortgage loan where the down payment to purchase the home was less than 20%. It can be cancelled once the homeowner has over 20% equity in their home (based off the value when they purchased the property) and is automatically removed once they have 22% equity based on the original purchase price.

Also, it can be removed after 24 payments if the home has appreciated and you have at least 25% equity. The premium for PMI varies depending on the borrower's credit score, debt to income ratio (DTI), and the amount that is being put as a down payment. The closer the down payment is to 20%, the lower the premium rate. It is typically paid monthly, but there is a single upfront premium option that should be explored if putting 15%+ down.

MIP is required on all FHA loans regardless of down payment. If putting down less than 10%, it will be on for the life of the loan. If putting down more than 10%, it can be removed after 11 years. The premium rate for MIP is set by FHA and just recently was reduced. MIP has both an upfront charge and a monthly charge as well.

While they are both expenses for the new homeowner for the benefit of the lender, they also allowed that homeowner to purchase their home with a lot less down than the old standard of 20% down.