FHA MIP vs. PMI: A Buyer’s Guide to California Mortgage Insurance

Home buyers in California often become confused about the differences between FHA mortgage insurance premiums and the private mortgage insurance (PMI) that applies to conventional home loans. And it’s easy to understand why. The terminology alone can be confusing.

But not to worry. We’re about to break down the basics for you.

In this article, we’ll explain the key differences between mandatory FHA mortgage insurance and the PMI that sometimes gets applied to conventional loans. We’ll talk about the basic requirements, the features, and the overall cost of these two different types of mortgage insurance.

At a Glance: FHA vs. Conventional Loans

Let’s start with the primary difference between FHA and conventional loans, before moving on to the mortgage insurance side of things.

The main difference between these two financing options has to do with government backing. FHA loans are insured by the Federal Housing Administration, a government agency that falls under the Department of Housing and Urban Development.

Conventional loans, on the other hand, do not receive any government insurance backing. Generally speaking, FHA loans are easier to qualify for because they are partly insured by the government, giving lenders and added layer of protection.

Mortgage insurance can be required for both FHA and conventional loans. The difference is that it’s almost always required on the FHA side, while home buyers who use conventional loans can avoid mortgage insurance by making a down payment above a certain amount. (More to follow on this.)

FHA Mortgage Insurance Premiums

Home buyers who use the Federal Housing Administration (FHA) loan program typically have to pay for mortgage insurance. In fact, the FHA requires two different types of insurance premiums – upfront and annual.

The upfront premium is equal to 1.75% of the loan amount. The annual mortgage insurance premium, or “MIP,” generally comes to 0.55% of the loan amount for most borrowers. But the annual MIP can vary, depending on the mortgage term and the amount of money you put down.

Most borrowers who use the FHA program put down less than 5% and have a mortgage term greater than 15 years. For this majority, the annual mortgage insurance premium comes to 0.55% of the loan amount.

Additionally, most borrowers who use this program have to pay the annual MIP for the life of the loan. It cannot be canceled the way it can for private mortgage insurance, which we will talk about next. This is an important distinction to understand when choosing a home loan option.

Conventional PMI in California

As mentioned, a California conventional mortgage loan is a “regular” home loan that does not receive any kind of government backing. The term “conventional” is used to distinguish this type of financing from government-backed mortgage programs, such as FHA, VA and USDA.

In California, conventional loans can also come with mortgage insurance. But it doesn’t come from the government, as with the FHA option. It comes from insurance companies operating within the private sector. So it’s commonly referred to as private mortgage insurance, or PMI.

Whenever you see “private” or “PMI” mentioned in an article about mortgage insurance, they are referring to conventional loans in particular.

Unlike an FHA loan, which requires mortgage insurance for nearly all borrowers, conventional home loans only require it in certain situations. PMI is usually required when a borrower makes a smaller down payment that results in a loan-to-value (LTV) ratio above 80%.

This is why some home buyers in California choose to put down 20% or more when buying a house. By doing so, they can keep the LTV ratio at or below 80%, thereby avoiding private mortgage insurance entirely.

Which One Costs More?

Cost is another important difference between FHA and conventional mortgage insurance.

The cost of FHA mortgage insurance is fairly straightforward. You’ll pay an upfront premium equaling 1.75% of the loan amount, along with an annual premium that comes to 0.55% for most borrowers.

But the typical cost of private mortgage insurance in California can vary, due to a number of factors. For example, borrowers with excellent credit often qualify for lower PMI rates, compared to those with shaky credit. The down payment size can also influence the amount you pay for private mortgage insurance on a conventional loan.

In California, the annual premium for a standard PMI policy is usually expressed as a percentage of the loan amount. And according to the Urban Institute’s Housing Finance Policy Center, the average cost ranges from 0.58% to 1.86% of the loan amount, per year.

Because of these variables, FHA mortgage insurance can be the more affordable option for some borrowers, while PMI for a conventional loan might work out better for other borrowers.

Generally speaking, the monthly FHA MIP tends to cost less than PMI for borrowers with lower credit scores. That’s because the FHA charges the same rate for all borrowers, regardless of credit scores. But the private mortgage insurance companies often charge more for borrowers with lower credit scores.

On the other hand, home buyers in California who have excellent credit might get a better deal by using a conventional loan with PMI, rather than the FHA option.

Every scenario is different, because every borrower is different. So it’s almost impossible to do an across-the-board comparison between FHA mortgage insurance and PMI. These two types of insurance work very differently, when it comes to their pricing and minimum requirements.

Need Help Choosing an Option?

You can estimate the cost of FHA mortgage insurance in California by applying the percentages mentioned above to the estimated loan amount. For example, to estimate the upfront mortgage insurance premium, you could multiply the expected loan amount by 1.75% (0.0175).

Estimating private mortgage insurance is trickier. You don’t know exactly how much you’ll be charged for a PMI policy in California, until you get a quote from the insurer. Your credit score, down payment, and other variables will determine how much you pay for PMI.

This underscores the importance of working with a knowledgeable mortgage professional, before making any final decisions. Our loan experts can review your current financial situation and home-buying goals to help determine the right financing option.

Please contact our staff if you have questions about paying mortgage insurance in California, or if you would like to receive a cost comparison for different options.