Is private mortgage insurance (PMI) for a conventional loan higher than mortgage insurance premium (MIP) for an FHA loan?
In short, there is no single answer to your question. Before we get into how much they cost, there are several points to keep in mind when you compare private mortgage insurance (PMI) to FHA mortgage insurance premium (MIP). First, PMI applies to conventional loans, which are not backed or insured by the government. FHA MIP only applies to FHA mortgages, which are insured by the government.
You are typically only required to pay PMI if your loan-to-value (LTV) ratio, or your mortgage amount divided by the value of the property being financed, is greater than 80%. The higher your LTV ratio, the higher the risk for the lender so you are required to pay PMI to protect the lender in the event you cannot repay your mortgage. This is an important point that applies to both PMI and FHA MIP: they are both insurance for the lender and not you, the borrower.
All borrowers are required to pay FHA MIP, regardless of your LTV ratio. Additionally, with an FHA mortgage you are required to pay an upfront FHA MIP fee, which is usually 1.75% of your loan amount. In comparison, you are usually not required to pay an upfront PMI fee for a conventional loan, although you may be required to prepay the first year of monthly PMI fees in advance when your mortgage closes.
Another important difference between PMI and FHA MIP is that you can request to have PMI removed if your LTV ratio drops below 78 to 80%, depending on your mortgage terms and if your PMI cancellation request is based on the current or original property value. You are required to pay FHA MIP for your entire mortgage if your LTV ratio at closing is greater than 90%. If your LTV ratio is less than or equal to 90% when your mortgage closes, you are required to pay monthly FHA MIP for 11 years.
The amount of ongoing, monthly PMI and FHA MIP fees you pay varies depending on your loan-to-value (LTV) ratio, loan amount, mortgage term, mortgage program and credit score. In short, the lower your credit score and higher your LTV ratio, the higher the PMI and FHA MIP you pay. Additionally, the longer your mortgage, the higher the PMI and FHA MIP you pay, so your monthly cost is greater with a 30 year mortgage as compared to a 15 year mortgage.
Because there are multiple inputs involved, the most accurate way to compare PMI to MIP is calculate their respective costs based on your specific situation. Both PMI and FHA MIP are calculated as a monthly fee, based on a percentage of your mortgage amount. The fee percentage changes depending on your specific mortgage terms, as outlined above. For some applicants PMI is higher but for applicants with different mortgage terms, FHA MIP is higher. Â
The examples below demonstrate how your LTV ratio and credit score impact the monthly fees. The first example shows a borrower with a 96.5% LTV ratio and a 660 credit score. The example assumes a $100,000 30 year fixed rate mortgage. As you can see, in this scenario the FHA MIP fee is lower than the PMI fee.
Example 1
LTV Ratio: 96.5%
Credit Score: 660
Mortgage Amount: $100,000
Loan Term: 30 years
PMI Fee as a % of the Mortgage Amount: 1.54%
Monthly PMI Fee: $128.33
FHA MIP Fee as a % of the Mortgage Amount: 0.85%
Monthly FHA MIP Fee: $70.83
In the second example below, the only factor that changes is the applicant credit score improves from 660 to 740. In this case, the PMI fee is lower than the FHA MIP fee.
Example 2
LTV Ratio: 96.5%
Credit Score: 740
Mortgage Amount: $100,000
Loan Term: 30 years
PMI Fee as a % of the Mortgage Amount: 0.70%
Monthly PMI Fee: $58.33
FHA MIP Fee as a % of the Mortgage Amount: .85%
Monthly FHA MIP Fee: $70.83
Please note that PMI and FHA MIP are subject to change. Review the resources below to see current monthly rates based on credit score, LTV ratio, loan length, mortgage program and other factors.
Review What is Private Mortgage Insurance? to see current PMI rates
Review our FHA Mortgage Guide to review current MIP rates
These examples demonstrate several points about PMI and FHA MIP. First, changing one criteria -- your credit score in this case -- can significantly change your monthly fees.
Second, as a general rule monthly FHA MIP is less than PMI for borrowers with credit scores below 740. In contrast, PMI is usually lower than FHA MIP for borrowers with higher credit scores and LTV ratios lower than 95%.
In addition to comparing monthly PMI and FHA MIP fees based on your personal criteria, you should compare the total cost of a conventional mortgage to the total cost of an FHA mortgage. You do this by adding the monthly insurance rate to the mortgage rate. In many cases, FHA mortgage rates are 0.250% to 0.750% lower than conventional mortgage rates, which helps offset the higher monthly MIP cost.
For example, if the mortgage rate on a conventional loan is 4.000% and the monthly PMI rate is 0.70%, the total cost is 4.700%. If an FHA loan has 3.750% mortgage rate and a monthly FHA MIP rate of 0.85%, the total cost is 4.600%. In this case, the FHA loan may be the better option financially.
Under different circumstances, the mortgage rate plus the PMI fee for the conventional loan could be lower than the rate on an FHA loan plus the MIP fee so it is important to compare the two options based on your individual circumstances before deciding what mortgage program makes the most sense.
The table below shows mortgage terms for both conventional and FHA loans. The closing fees for the FHA loans include the upfront MIP, which is a significant closing cost to consider. We recommend that you shop multiple lenders to find the mortgage program that is right for you.
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Please note that in some cases lenders charge a higher mortgage rate instead of charging PMI separately on a monthly basis, which is called lender paid PMI. We always recommend that you request to pay PMI separately (as opposed to paying the higher interest rate which includes PMI), because you can request to have PMI removed when your LTV ratio drops below the minimum threshold.
With lender paid PMI, you pay the higher interest rate for your entire mortgage, which can cost you much more in the long run. Additionally, reviewing the PMI fee separately for a conventional loan enables you to more easily compare it to monthly FHA MIP fees. Always ask if the PMI fee is included in the mortgage rate for a conventional loan and if the answer is yes, request to review and pay PMI separately.
Sources
"B7-1-02, Mortgage Insurance Coverage Requirements." Selling Guide: Fannie Mae Single Family. Fannie Mae, August 7 2019. Web.
"II.A.2.e. Mortgage Insurance Premiums." FHA Single Family Housing Policy Handbook 4000.1. Federal Housing Administration, January 2 2020. Web.
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