Home buyers who have limited down payments for a home mortgage have the option to get a Mortgage Insurance Premium, also known as: MIP, or simply mortgage insurance.
Traditionally a 20% down payment is required on a home, but many homeowners don’t have the ability to put down such a large amount. For instance, 20% of a $210,000 house is $42,000. In this case, many will turn to FHA loans from the Federal Housing Administration for a down payment as low as 3.5%. This makes the down payment a more manageable $7,350.
To achieve this scenario, a buyer must pay a Mortgage Insurance Premium in addition to their monthly payments. An MIP is administered by the government and will actually cover monthly payments for you in case you become disabled or lose your job. It’s also paid off by the government in the event of your death.
Don’t get this confused with a Private Mortgage Insurance, or a PMI. PMIs are privately offered through lending institutions and can come in a variety of payment options custom-fit to meet your needs. These are structured differently on a case by case basis. This protects the lender in the event of a default, and does not cover you in the above scenarios.
While an MIP is designed to protect you, it does increase your monthly payments. This is why it’s recommended to avoid getting an MIP if you can help it, but if you must, there are still ways to get out of it. Of course, the easiest way is to put the 20% down on your mortgage on the agreed upon closing date. If this isn’t possible, a lender may give you the option of a higher interest rate in exchange of waiving the MIP.
Another way is to reassess the value of your home a few years into your mortgage. If this value has changed or increased, the MIP can be dropped. Hire a professional appraisal company and send the report to provider.