When you buy a home with a down payment of less than 20%, your lender will almost certainly require you to carry some form of mortgage insurance. This insurance does not protect you — it protects the lender if you stop making payments and the home goes into foreclosure. Despite that one-sided benefit arrangement, the cost comes out of your pocket every month.
Two distinct types of mortgage insurance exist in the U.S. housing market, and they operate under very different rules: PMI (Private Mortgage Insurance), which applies to conventional loans, and MIP (Mortgage Insurance Premium), which applies to FHA loans. The terms are not interchangeable, and understanding the difference can meaningfully affect which loan type you choose and how long you end up paying for coverage you may be able to eliminate.
What Is PMI (Private Mortgage Insurance)?
Private Mortgage Insurance applies to conventional loans — mortgages that are not backed by a government agency but instead conform to the purchase standards set by Fannie Mae and Freddie Mac, the two government-sponsored enterprises that buy and securitize the majority of U.S. mortgages.
PMI is required on conventional loans whenever the borrower's down payment is less than 20% of the home's purchase price — in other words, when the loan-to-value ratio (LTV) at origination exceeds 80%. The lender mandates it because, statistically, borrowers with less skin in the game are more likely to default, and at a higher LTV, the lender risks recovering less than the outstanding loan balance in a foreclosure sale.
PMI is provided by private insurance companies — not the federal government — and lenders typically work with several approved PMI providers. The premium rate varies based on several factors: your credit score, the loan-to-value ratio, the loan term, whether the rate is fixed or adjustable, and the specific PMI provider. As a general range, annual PMI premiums run from roughly 0.5% to 1.5% of the original loan amount, with most borrowers in the 0.6%–1.0% range for loans with credit scores above 720.
Loan amount: $280,000
PMI rate: 0.85% annually
Annual PMI cost: $280,000 × 0.0085 = $2,380
Monthly PMI added to payment: $198.33/month
A borrower with a lower credit score (say, 680) might see a PMI rate closer to 1.2%:
Monthly PMI: $280,000 × 0.012 / 12 = $280/month
PMI is typically paid as a monthly premium added to the mortgage payment, though some lenders offer single-premium PMI (paid upfront at closing) or lender-paid PMI (where the lender covers it in exchange for a slightly higher interest rate). Monthly PMI is the most common structure and the most straightforward to understand.
How and when PMI can be removed is one of the most important things to understand about it. Under the federal Homeowners Protection Act (HPA) of 1998, you have the right to:
- Request cancellation when your loan balance reaches 80% of the home's original purchase price (meaning you have 20% equity). You must be current on payments and may need to demonstrate that the home's value has not declined.
- Automatic termination: even if you never request it, the lender is legally required to cancel PMI when your loan balance reaches 78% of the original purchase price — as long as you are current on payments at that time.
- Final termination: PMI must be cancelled at the midpoint of your loan's amortization period, regardless of the outstanding balance, if you are current on payments.
If your home has appreciated significantly, you may also be able to request PMI removal sooner by ordering a new appraisal that demonstrates your current LTV is below 80% based on market value — though lender policies on this vary.
What Is MIP (Mortgage Insurance Premium)?
Mortgage Insurance Premium applies to FHA loans — mortgages backed by the Federal Housing Administration, a division of the U.S. Department of Housing and Urban Development (HUD). FHA loans are a popular choice for first-time buyers because they allow lower credit scores (as low as 580 for the standard 3.5% down payment) and more flexible qualification standards than conventional loans.
Unlike PMI, which is priced by private companies and varies by provider, MIP rates are set by HUD and are uniform across all FHA lenders. MIP also has a structure that differs fundamentally from PMI: it consists of two separate charges.
Upfront MIP (UFMIP): At closing, FHA loans require an upfront mortgage insurance premium equal to 1.75% of the base loan amount. On a $280,000 loan, that is $4,900 due at closing — or more commonly, it is rolled into the loan balance, which increases the amount borrowed and therefore increases monthly payments slightly. This upfront premium is paid regardless of the loan term, LTV ratio, or credit score.
Annual MIP: In addition to the upfront premium, FHA borrowers pay an ongoing annual MIP divided into monthly installments. The rate depends on the loan term and LTV at origination. For a 30-year FHA loan with a down payment between 3.5% and 10% (LTV between 90% and 96.5%), the annual MIP rate is currently 0.55% of the outstanding loan balance.
Base loan amount: $280,000
Upfront MIP (1.75%): $4,900 — typically financed into the loan
Adjusted loan balance: $284,900
Annual MIP rate (30-yr, <10% down): 0.55%
Monthly MIP: $284,900 × 0.0055 / 12 = $130.57/month
Total first-year MIP cost (upfront + 12 monthly): ~$6,467
The single most important difference between MIP and PMI — and the one that most often surprises FHA borrowers — is what happens over the long term. For FHA loans originated with a down payment below 10%, the annual MIP cannot be cancelled. It remains for the entire life of the loan, 30 years if that is the chosen term. The only way to eliminate it is to refinance out of the FHA loan into a conventional loan once enough equity has accumulated.
Borrowers who put down 10% or more on an FHA loan do have their annual MIP cancelled after 11 years — a significant improvement, but still far less flexible than the PMI cancellation rules for conventional loans.
PMI vs MIP Comparison
| PMI (Conventional) | MIP (FHA) | |
|---|---|---|
| Loan type | Conventional (Fannie/Freddie) | FHA government-backed |
| When required | Down payment < 20% | Always (with any down payment) |
| Upfront cost | None (usually) | 1.75% of loan (at closing) |
| Annual cost range | 0.5%–1.5% of loan | 0.15%–0.75% of loan |
| How long it lasts | Until 78–80% LTV | Life of loan (<10% down) or 11 years (≥10% down) |
| How to remove | Request at 80% LTV; auto-cancel at 78% | Refinance into conventional loan |
Which Is Better?
There is no universal answer — the right choice depends on your specific credit profile, down payment, how long you plan to stay in the home, and how quickly you expect the property to appreciate.
FHA may make more sense if: your credit score is below 680, you are struggling to qualify for a conventional loan, or the FHA rate and terms are substantially better than anything you can qualify for conventionally. FHA's more lenient debt-to-income ratio standards also make it more accessible for buyers carrying student loans or other debt. The 3.5% minimum down payment is the same as many conventional programs, but the qualifying standards are generally more forgiving.
Conventional with PMI may make more sense if: your credit score is 700 or above (PMI rates become competitive, and in some cases lower than MIP when combined with the absence of an upfront premium), you are confident you will build 20% equity within a reasonable time frame, or you want the flexibility to eventually eliminate mortgage insurance without refinancing. The fact that PMI is cancellable — and MIP on a low-down-payment FHA loan is not — is a significant long-term cost difference.
To illustrate: on that $280,000 loan over 10 years, PMI at 0.85% would total roughly $17,000 in premiums before cancellation (assuming the borrower reaches 20% equity around year 8–9). MIP on the same loan at 0.55% annual plus $4,900 upfront would total approximately $22,000 over 10 years — and would continue past year 10 if the borrower does not refinance. The gap widens further for borrowers who keep the loan past the point where PMI would have been cancelled.
VA and USDA Loans: A Brief Note
Two other government-backed loan programs are worth mentioning because they handle mortgage insurance differently from both FHA and conventional loans.
VA loans, available to eligible veterans, active-duty service members, and surviving spouses, require no down payment and carry no ongoing monthly mortgage insurance at all. Instead, VA loans have a one-time VA Funding Fee paid at closing (or financed into the loan), which ranges from 1.25% to 3.3% of the loan amount depending on whether it is a first or subsequent use and the down payment size. Many veterans with service-connected disabilities are exempt from the funding fee entirely.
USDA loans, available for properties in eligible rural and suburban areas to borrowers meeting income limits, also require no down payment. They carry an upfront guarantee fee of 1.0% of the loan amount plus an annual fee of 0.35% — both lower than FHA's MIP structure, and the annual fee can be cancelled once the LTV reaches 80% based on the original appraised value.
Using the Mortgage Calculator
Before committing to an FHA or conventional loan, run the numbers for your specific situation. Our Mortgage Calculator includes a PMI field so you can model the true monthly cost of a conventional loan with PMI — and compare it directly to an FHA loan's payment structure including MIP. Small differences in monthly payment can compound significantly over 5 or 10 years, making the side-by-side comparison well worth the few minutes it takes.
For a deeper understanding of how the rest of your mortgage payment is structured over time, read our companion article How Mortgage Amortization Actually Works. And for guidance on how to determine a home purchase price you can comfortably afford, see How Much House Can I Afford?