Understanding the Mortgage Insurance Premium (MIP)

There are a lot of new terms and acronyms that you will come across when you are purchasing a San Diego house. Pros who are experienced in the industry will throw around these terms like you’re supposed to know what they mean. This could be your real estate agent or your mortgage lender. One such acronym is for mortgage insurance premium or MIP.

What is mortgage insurance premium?

MIP is an insurance policy that protects the lender in case the borrower defaults on the mortgage. It is a requirement of all FHA Loans.

The reason why it is required on these loans is that the down payments required are much smaller than a traditional mortgage loan. Conventional mortgages include a 20% down payment where FHA loans will take a down payment as small as 3.5%. This means the lender is taking on greater risk if the borrower does not continue paying on the mortgage.

MIP is not optional if the lender requires you to pay it. You do not have a choice unless you are able to obtain a mortgage loan through a different lender or program.

Is there a benefit to the San Diego homeowner?

The only benefit that mortgage insurance premium offers to the San Diego buyer is the fact that they are able to make a smaller down payment. If the buyer has a 20% down payment, they will not need to obtain MIP because they can apply for a conventional mortgage loan. The true benefit of MIP is to the lender.

How long do I have to pay MIP?

Unfortunately, following the housing crisis the rules have changed about when MIP can be removed. It used to be that when you reached 20% equity in your San Diego home you would be able to have MIP removed from your mortgage loan. When you got to a slightly higher percentage the mortgage lender was required to remove it from your loan without you even requesting it.

But, after the housing crisis the mortgage industry became stricter. Now, if you obtain an FHA loan that has MIP, you will have to carry the additional insurance through the life of your loan.

However, this does not mean that you need to carry the extra insurance through the entire time it takes you to pay off your mortgage. Instead, when you reach 20% equity, you can refinance your loan into a new mortgage in order to remove the MIP.

You will want to run the numbers before doing so to make sure that any closing costs and additional fees that you need to pay on your new loan will be offset by the money you’re saving in removing the MIP from your payment.

If you have questions about MIP or your different mortgage options talk to a San Diego mortgage lender. This is also a reason why it’s good to talk to multiple mortgage lenders before choosing one to work with. Make sure to ask about all the different programs that you qualify for to purchase a San Diego house.