What is Mortgage Insurance Premium (MIP)?

MIP is a type of insurance required on FHA loans that protects lenders against losses if a borrower defaults. It consists of an upfront fee and annual premiums, making low down payment loans possible while maintaining financial system stability.

How much does MIP cost?

MIP includes an upfront fee of 1.75% of the loan amount and annual premiums ranging from 0.45% to 1.05% of the loan amount, depending on the loan term and down payment size.

Can MIP be removed from an FHA loan?

Unlike conventional PMI, FHA MIP typically cannot be removed, even after reaching 20% equity. The only way to eliminate MIP is to refinance to a conventional loan once you have sufficient equity.

Mortgage Insurance Premium (MIP) Explained

Financial Education Series

June 14, 2025

The Safety Net Behind Low Down Payment Loans

Mortgage Insurance Premium (MIP) is a crucial component of FHA loans that makes homeownership accessible to more people while protecting the financial system. Understanding how MIP works helps borrowers make informed decisions about their mortgage options.

Why MIP Matters

MIP is what makes FHA loans possible with down payments as low as 3.5%. It's a carefully designed system that balances accessibility with financial stability, unlike the risky subprime lending practices that contributed to the 2008 financial crisis.

How MIP Works

The Two Components of MIP

Upfront MIP

A one-time fee of 1.75% of the loan amount, typically added to your loan balance. This helps build the FHA's insurance fund immediately.

Annual MIP

Monthly payments ranging from 0.45% to 1.05% of the loan amount, depending on your loan term and down payment size. This provides ongoing protection for the FHA.

Real Cost Example

$250,000 FHA Loan

Upfront MIP (1.75%)$4,375

Annual MIP (0.85%)$2,125/year

Monthly MIP Payment$177/month

Total MIP Cost (30 years)$68,125

Why MIP is Different from Subprime Lending

A Sustainable System

Built-in Protection

Unlike subprime lending, which relied on ever-increasing home values and quick refinancing, MIP provides a sustainable safety net through:

Mandatory insurance premiums that build a reserve fund

Strict underwriting standards despite low down payments

Government backing that ensures lender protection

Long-term Sustainability

MIP creates a sustainable system by:

Building a reserve fund through premiums

Maintaining strict loan standards

Reducing default risk through proper underwriting

Making Informed Decisions

Is an FHA Loan Right for You?

Consider FHA If:

You have a lower credit score (580+)

You can only afford a small down payment

You plan to stay in the home long-term

Consider Conventional If:

You have good credit (680+)

You can make a larger down payment

You want to avoid permanent MIP

Key Takeaways

MIP makes low down payment FHA loans possible while protecting the financial system
The cost includes both upfront and annual premiums
Unlike subprime lending, MIP is a sustainable system with proper safeguards
Consider your long-term plans and financial situation when choosing between FHA and conventional loans

This content is educational in nature and updated as of 2025. We aim to relay factual financial information, similar to how a newspaper would report market data. For complete information about our services, please review our Terms of Service.