Mortgage Insurance Premium (“MIP”):
What is the definition of MIP? A premium paid on mortgage insurance for Federal Housing Administration (FHA) loans. The FHA assesses both an up-front MIP (UFMIP) at the time of closing, and an annual MIP that is calculated every year and paid in 12 installments. The up-front MIP is a fixed amount and applies regardless of the amortization term or LTV ratio. The rate paid for annual MIP depends on the length of the loan, loan amount and the loan-to-value (LTV) ratio.
History & Origins
Why MIP is needed: like most financial services companies, mortgage companies have checks and balances in place to protect against losses that result from defaults on loans. FHA requirements include mortgage insurance, primarily for borrowers making a down payment of less than 20 percent. This can allow the borrower to purchase a home without having the standard 20 percent down payment.
Real Life Applications
In 2015, President Obama announced that FHA mortgage insurance premiums will be lowered by half a percentage point, from 1.35 percent to 0.85 percent (for loans < $625K, terms > 15 years and down payments <=5%). The National Association of Realtors estimates this reduction in the annual MIP will enable many first-time borrowers, and other borrowers who are typically undeserved by the lending community, to obtain home loans and help them get into the buying market (and out of renting!).
Buying a house with an FHA loan is now more affordable in many cases, so check with your preferred lender about how much home you may now qualify for with this reduction. It could amount to either meaningful savings on a monthly basis or an opportunity to purchase more home. Remember you will still have to complete a loan application, meet the product credit requirements and provide documentation regarding the ability to repay the loan; FHA loans are government backed and require full documentation from borrowers.
The Last Word
Always consider what you can comfortably afford. While you may be able to "buy more home" with this reduction – getting you more for your money – be aware of your monthly cash flow so you don't bite off more than you can chew long term.