What Is MPI (Mortgage Insurance Premium) on a Mortgage Loan?
Understand Mortgage Insurance Premium (MPI): an essential aspect of certain home loans. Learn its function, costs, and how it impacts your mortgage journey.
When securing a home loan, many borrowers encounter various costs beyond the principal and interest. One such cost is mortgage insurance, a requirement designed to protect lenders. This insurance shifts some of the risk from the financial institution to an insurer, which can allow lenders to offer more accessible loan products to a broader range of borrowers.
Understanding Mortgage Insurance Premium
Mortgage Insurance Premium (MPI) is a specific type of mortgage insurance exclusively associated with loans insured by the Federal Housing Administration (FHA). It serves a primary purpose: to protect the lender against potential financial losses if a borrower defaults on their FHA-insured mortgage. The FHA insures these loans, thereby reducing the risk for approved lenders.
The requirement for MPI on FHA loans stems from their more flexible lending standards, which include lower down payment requirements and more lenient credit score criteria compared to conventional loans. This insurance mechanism makes it possible for lenders to approve mortgages for individuals who might not otherwise qualify for a home loan. MPI provides a safety net for the FHA insurance fund, supporting wider availability of affordable home financing. All FHA loans require MPI, regardless of the borrower’s down payment amount or credit score.
How MPI is Calculated and Paid
MPI consists of two distinct components: an Upfront Mortgage Insurance Premium (UFMIP) and an Annual Mortgage Insurance Premium (Annual MIP). The UFMIP is a one-time charge, calculated as 1.75% of the base loan amount. This premium is paid at the loan closing, though borrowers can finance it by adding it to their loan amount, accruing interest.
The Annual MIP is an ongoing cost, paid in monthly installments as part of the borrower’s regular mortgage payment. Its calculation is based on a percentage of the remaining loan balance, and the specific rate varies depending on factors such as the loan amount, the loan-to-value (LTV) ratio, and the loan term. Rates are often around 0.55% of the loan amount. This annual premium is divided by 12 and incorporated into each monthly payment.
Duration and Removal of MPI
The duration for which borrowers must pay MPI on an FHA loan depends significantly on the loan’s origination date and the initial down payment. For FHA loans with case numbers assigned on or after June 3, 2013, the rules for MPI duration changed. If the initial down payment was less than 10% of the home’s purchase price, MPI is required for the entire life of the loan.
However, if a borrower made a down payment of 10% or more on an FHA loan originated on or after June 3, 2013, the Annual MIP requirement can be removed after 11 years. For FHA loans originated before June 3, 2013, MPI was canceled once the loan-to-value (LTV) ratio reached 78%. A common strategy for borrowers to eliminate MPI is to refinance the FHA loan into a conventional mortgage.
Distinguishing MPI from Private Mortgage Insurance
MPI and Private Mortgage Insurance (PMI) both serve to protect lenders, but they apply to different types of mortgage loans and have distinct characteristics. Mortgage Insurance Premium (MPI) is exclusively associated with loans insured by the Federal Housing Administration (FHA). This means the insurance is backed by a government entity.
Conversely, Private Mortgage Insurance (PMI) is required for conventional loans when the borrower makes a down payment of less than 20% of the home’s purchase price. PMI is issued by private companies, not a government agency. Their cancellation rules also differ: MPI remains for the entire loan term unless refinanced, while PMI on conventional loans can be canceled once a borrower reaches 20% equity in their home.