MIP is an abbreviation for Mortgage Insurance Premium. When you pay it each month as a part of your mortgage payment you are paying for insurance. But the insurance doesn’t benefit you, it benefits the lender.
Under many circumstances where you don’t pay at least 20% down on your house purchase the lender is going to require mortgage insurance in order to make the loan. Let’s face it. The mortgage represents a risk on the part of the lender who is giving you money merely on your promise to repay. In return for loaning you the funds, they get a little of the funds paid back each month plus some extra money, called interest, for their trouble. It’s that extra amount of money they receive each month that motivates them to take the risk and offer you the loan in the first place.
When you pay less than 20% down the risk for the lender is greater. So, they add on an “insurance policy” that will cover their loss in case you can’t repay the loan and lose the house. But what loss do they have, you ask? Don’t they get the house? Can’t they just resell it and get their money back? Yes, and they will. But at the very least the cost to do that is roughly 8% of their final sale price of the house. And if there are other issues with the property such as deferred maintenance or a need for repairs the expense will be much higher. When you pay at least 20% down at purchase, the lender sees that you’re accepting more risk in the ownership of the house because now if you lose the house you lose your 20% equity as well. And that twenty percent will also help them cover the expenses of turning the house over in the Real Estate market.
Remember, lenders aren’t Real Estate investors. They don’t want to own houses. They just want to lend money. When a house loan goes bad they don’t see that as a good thing. As a result we have MIPs.
Here’s some more good news. If your loan is a conventional loan, after you’ve reached 20% equity ownership in your house in many cases the lender will drop the MIP requirement from your monthly payment. Won’t it be a great day down the road when you get your monthly mortgage statement and see your payment has dropped significantly? To be sure this will happen for you make it a point to discuss with your lender about the MIP, how it works, and when it will disappear. But if you’re getting a Federally insured FHA loan, forget it. The MIP payment will be on that loan until you pay it off or refinance your house.
If you’re in the market for a new home and you have questions about financing, call me at 918-809-5199. I have some excellent contacts who will make sure you know everything you need to know before you commit to anything.