PMI vs MIP: Mortgage Insurance Costs Compared

How PMI Works

Private Mortgage Insurance (PMI) is required on conventional loans when your down payment is less than 20%. It protects the lender — not you — if you default. PMI costs 0.3-1.5% of the original loan amount per year, depending on your credit score, LTV ratio, and loan size. On a $350,000 loan, that’s $87-$437/month. Borrowers with 760+ scores and 15% down pay toward the low end. Borrowers with 660 scores and 5% down pay toward the high end.

PMI is arranged by the lender through a private insurance company — MGIC, Radian, Essent, or Genworth are the major players. You don’t shop for PMI directly; the lender selects the provider based on pricing. PMI can be paid monthly (added to your mortgage payment), upfront as a lump sum at closing, or as a combination of both. Monthly payment is most common because it requires no additional cash at closing.

The best feature of PMI: it goes away. Once you reach 80% LTV (through payments and/or appreciation), you can request cancellation. At 78% LTV, the lender must cancel it automatically. On a $350,000 loan with 10% down, you’d reach 80% LTV in roughly 7-8 years with normal payments. If your home appreciates 10-15%, you might hit 80% LTV in 3-4 years through a new appraisal. That’s thousands in annual savings when PMI drops off. Model your timeline with the mortgage calculator.

How MIP Works

Mortgage Insurance Premium (MIP) is the FHA version of mortgage insurance. It has two components: an upfront premium of 1.75% of the loan amount (paid at closing or rolled into the balance) and an annual premium of 0.55% paid monthly. On a $350,000 FHA loan, the upfront MIP is $6,125 and the annual MIP is $160/month. Both are mandatory — there’s no way to avoid MIP on an FHA loan regardless of your down payment.

The upfront MIP gets added to your loan balance if you don’t pay it in cash. So a $350,000 loan becomes $356,125 after the upfront MIP is financed. You’re paying interest on your mortgage insurance for 30 years — roughly $8,000 in additional interest over the life of the loan on that $6,125. It’s a hidden cost that doesn’t show up in the monthly payment breakdown but absolutely affects your total cost of borrowing.

The critical difference from PMI: for most FHA borrowers, MIP never goes away. If you put less than 10% down (which is most FHA borrowers), MIP stays for the life of the loan. Only borrowers who put 10%+ down see MIP removed — after 11 years. Compare that to PMI, which drops off at 80% LTV regardless of down payment. On a $350,000 loan, 30 years of MIP at $160/month totals $57,600. That’s a massive cost that many FHA borrowers don’t fully appreciate at origination.

Key Differences Between PMI and MIP

Duration is the most expensive difference. PMI typically lasts 7-10 years before the borrower reaches 80% LTV and cancels it. MIP (on sub-10% down FHA loans) lasts the full 30 years. On a $350,000 loan with 5% down, here’s the lifetime cost comparison:

That $46,925 difference is life-changing money. It’s a new car. A child’s college fund. Three years of retirement savings. The monthly MIP cost looks similar to PMI — $160 vs. $175 — but the duration transforms a manageable expense into a massive long-term cost. This is the single biggest reason to choose conventional over FHA when you can qualify for both.

Credit score sensitivity differs between the products. PMI rates vary dramatically with credit score — a 760 score might pay 0.30%/year while a 660 score pays 1.20%/year. MIP is flat at 0.55% regardless of credit score. For borrowers with excellent credit, PMI is much cheaper month-to-month and drops off sooner. For borrowers with lower credit (under 700), FHA’s flat MIP rate can actually be cheaper per month — but the lifetime cost still favors PMI because of cancellability.

Cancellation mechanics are straightforward for PMI. You request cancellation at 80% LTV based on original value, or get a new appraisal showing you’ve reached 80% through appreciation. The lender must comply under the Homeowners Protection Act. MIP has no such mechanism — the only way to stop paying FHA MIP is to refinance into a conventional loan, which costs $3,000-$8,000 in closing costs and requires qualifying at current rates with sufficient equity.

When PMI Is the Better Choice

PMI wins for any borrower with a 680+ credit score and 5-19% down payment who can qualify for a conventional loan. The monthly cost might be slightly higher than MIP in the early years, but the cancellation feature saves tens of thousands over the loan’s life. Even if your PMI rate is $175/month versus $160/month for MIP, the $15/month premium buys you the right to eliminate the cost entirely in 7-10 years.

PMI is especially advantageous for borrowers who expect home appreciation. In markets where home values are rising 3-5% annually, you could reach 80% LTV through appreciation alone in 3-5 years. A borrower who bought at $400,000 with 10% down ($40,000 equity) needs the home to reach $450,000 for 80% LTV on the $360,000 loan. At 4% annual appreciation, that takes about 3 years. Cancel PMI, save $150+/month, and redirect those savings. MIP offers no such escape hatch.

When MIP Is the Only Option

MIP is the trade-off you accept when FHA is the only loan you qualify for. If your credit score is 580-660, conventional lenders either won’t approve you or will charge PMI rates above 1.2% — close to $350/month on a $350,000 loan. At that point, FHA’s flat 0.55% ($160/month) is cheaper month-to-month, and FHA’s lower credit requirements get you into the home. The lifetime MIP cost is high, but homeownership — and the equity buildup and appreciation that come with it — often outweighs the insurance expense.

FHA also makes sense when you’re planning to refinance within 3-5 years. If you need the easiest path to homeownership now and expect your credit score and equity position to improve, you can start with FHA and refinance into a conventional loan once you qualify. At that point, PMI on the new conventional loan will be cancellable, and you’ll be done with permanent MIP. Budget $4,000-$7,000 for the refinance closing costs when planning this strategy.

Common Mistakes to Avoid

Choosing FHA for the lower monthly insurance without considering duration. MIP at $160/month looks cheaper than PMI at $175/month. But $160 x 360 months = $57,600, versus $175 x 96 months = $16,800. The “cheaper” monthly option costs $40,800 more over the life of the loan. Always calculate total insurance cost, not just the monthly payment. The upfront MIP ($6,125) makes the gap even wider.

Forgetting to request PMI cancellation. Automatic cancellation at 78% LTV is the law, but you can request it earlier at 80% — and many borrowers don’t. Every month you pay PMI past the 80% LTV mark is wasted money. Track your LTV annually. When you’re close, order an appraisal ($400-$600) to prove your home’s current value. If appreciation has pushed you to 80%, cancellation is immediate. Set a calendar reminder for the projected date when your amortization schedule hits 80%.

Not comparing the FHA-to-conventional refinance timeline. Many buyers take FHA planning to refinance into conventional “in a couple years.” But refinancing requires good credit, sufficient equity, closing costs, and favorable rates. If rates are higher when you try to refi, the higher conventional rate might offset the MIP savings. Model the full scenario: current FHA payment with MIP, versus future conventional payment with PMI, accounting for refi costs. Our refinance calculator can help.

Assuming PMI is always expensive. Borrowers with 740+ credit and 15% down often pay PMI of 0.30-0.40% — around $87-$117/month on $350,000. That’s less than FHA’s MIP, and it cancels in 3-5 years. High-credit borrowers sometimes default to FHA because “it’s easier” without realizing that conventional with cheap, temporary PMI is dramatically cheaper long-term. Get quotes for both before deciding.

Frequently Asked Questions

Can I avoid PMI without 20% down?

Yes, through “lender-paid mortgage insurance” (LPMI) where the lender absorbs the PMI cost in exchange for a higher rate (typically 0.25-0.50% more). You’ll never see a PMI line item, but you’re effectively paying it through a higher rate. The catch: LPMI is built into the rate permanently — you can’t cancel it at 80% LTV. The only way out is refinancing. LPMI can work for borrowers who plan to refinance within 5-7 years, but borrower-paid PMI that cancels is better for long-term holds.

Does PMI or MIP cover me if I can’t make payments?

Neither. Both protect the lender, not you. If you default and the home sells at foreclosure for less than the loan balance, the insurance pays the lender the difference. You still lose the home, your credit is damaged, and you may owe a deficiency balance depending on your state. Mortgage insurance is a cost you bear that benefits someone else entirely. It’s the price of admission for borrowing with less than 20% down.

What credit score do I need for the cheapest PMI?

760+ gets the best PMI rates. At 760 with 15% down, expect 0.25-0.35% annually. At 700 with 10% down, rates jump to 0.55-0.75%. At 660 with 5% down, you’re looking at 1.0-1.5%. The gap between best and worst PMI rates on a $350,000 loan is roughly $300/month — the difference between $73/month and $437/month. If your score is below 720, improving it by even 20-40 points before applying can save more than any other optimization.

Can I deduct PMI or MIP on my taxes?

The mortgage insurance deduction has been inconsistent — it expires and gets renewed by Congress periodically. When available, both PMI and MIP premiums are deductible for borrowers with adjusted gross income under $100,000 (phases out between $100K and $109K). Check current tax law for the year you’re filing. Even when available, the deduction only matters if you itemize — and many borrowers take the standard deduction instead. The FHA upfront MIP is deductible over the loan’s life, not in a lump sum.

How do I get PMI removed with a new appraisal?

Contact your loan servicer and request PMI cancellation based on current home value. You’ll need to pay for an appraisal ($400-$600). If the appraisal shows your LTV is at or below 80%, the servicer must cancel PMI. Some servicers require you to have owned the home for at least 2 years and have no late payments in the past 12 months. If appreciation has been strong in your area, this approach can save you 3-5 years of PMI compared to waiting for amortization alone.

Is there a way to get rid of FHA MIP without refinancing?

Only if you put 10%+ down on the original FHA loan — in which case MIP drops off after 11 years. For the majority of FHA borrowers who put 3.5% down, MIP is permanent. The only exit is refinancing into a conventional loan, which requires: 620+ credit (680+ for best rates), sufficient equity for the new loan, qualifying income and DTI, and paying closing costs. Plan for this refi from day one of your FHA loan — it’s not optional if you want to stop paying MIP.