The more comfortable you are with mortgage lingo, the more confident you can be about your homebuying journey. Ready to add another word to your mortgage term dictionary? One phrase you’re bound to come across is mortgage insurance premium, often shortened to MIP.
What is mortgage insurance premium (MIP)?
Sometimes navigating all the mortgage jargon can feel like wandering through a maze. Lucky for you, PrimeLending loan officers are like the map of the maze you snuck in so that you know all the right turns to make. I remember the first time someone mentioned MIP to me; I thought it was the same as PMI (private mortgage insurance)—which it’s not.
Mortgage insurance premium is a payment required on all Federal Housing Association (FHA) loans when a borrower’s down payment is less than 20%. This is the lender’s way of minimizing their risk if a borrower defaults on their mortgage payment. Typically, MIP is charged as an upfront payment within 10 days of closing day. This a good option for borrowers to be able to afford a mortgage even if they can’t afford a 20% down payment.
Understanding FHA mortgage insurance premium
One of the most popular mortgages for first-time homebuyers an FHA loan. Since this mortgage is backed by the Federal Housing Association, it offers lower down payment requirements and more flexible credit requirements.
With a down payment requirement as low as 3.5%, FHA loans require mortgage insurance premium because if a homeowner defaults on their mortgage, the FHA will pay a claim to the lender for the principal balance that has not been paid. This helps lenders keep FHA down payment requirements low.
MIP is different than PMI, because mortgage insurance premium is unique to FHA loans while private mortgage insurance is common on a wide range of conventional loans. Borrowers can also have their PMI removed once their home value reaches 20% of their mortgage.
Are mortgage insurance premiums tax deductible*?
Time for everyone’s favorite talking point—taxes. If homeowners paying mortgage insurance premiums itemized their deductions, they were able to write off their premiums for the 2018 through 2021 tax years. However, this is no longer available as of tax year 2022 and Congress would have to reintroduce the tax deduction for it to be in effect once again.
While you may not be able to deduct your mortgage insurance premiums from your taxes, you may be able to deduct your interest using Form 1098 from the IRS sent to you by your mortgage company each year in January. Keep in mind it’s important that you speak with a tax expert to thoroughly understand your deductible options.
The quest for a home loan without mortgage insurance
It’s no secret that a down payment plays a big role in a borrower’s mortgage options. It also impacts whether or not a mortgage insurance premium will be tacked onto the mortgage as well. Down payments can also affect home affordability.
We’ve already gone over how mortgage insurance is usually required when a borrower makes a down payment that is under 20% of the loan amount. But, if a 20% down payment isn’t feasible for you, and you want to try to avoid mortgage insurance, what are your options? Since FHA loans require mortgage insurance, try a different government-backed mortgage, like a USDA or VA loan.
- USDA mortgage—Guaranteed by the United States Department of Agriculture (USDA), this home loan can help make homebuying affordable for rural and a small number of suburban borrowers by offering lower interest rates and no down payment options. Instead of a mortgage insurance premium, it has an upfront fee that can be rolled into the loan to eliminate an out-of-pocket expense at closing.
- VA mortgage—Backed by the U.S. Department of Veterans Affairs (VA), this mortgage offers exclusive benefits to active-duty and retired military members, and/or their qualified spouses. These benefits include no down payment, higher loan value, and NO private mortgage insurance.
If neither of these programs are a good fit and you end up having an FHA mortgage with a mortgage insurance premium, you still have options. While you can’t remove MIP from your FHA loan, you could refinance to a conventional mortgage without private mortgage insurance after your home’s LTV drops below 80%.
The best way to understand how mortgage insurance premiums affect your mortgage options is to talk with a loan officer. PrimeLending loan officers across the country specialize in lending for their specific communities and markets. Connect with your local mortgage expert today to get started.
*PrimeLending is not authorized to give tax advice. Please consult your tax adviser for tax advice for your specific situation.
