Mortgage Insurance (PMI and MIP).
In plain English
When you put down less than 20 percent, the lender makes you pay for insurance that covers the lender's loss if you default. You pay it every month. You get nothing back from it and it does not build your equity. Conventional loans call it PMI and it cancels once you have enough equity. FHA loans call it MIP, and on a low down payment FHA loan it usually lasts the entire life of the loan.
02The math, step by step
On a $380,000 conventional loan, PMI at 0.5 percent runs about $1,900 a year, then stops once your balance reaches 78 to 80 percent of the home's value (often around year 10). On a similar FHA loan, the annual premium is about the same per year but never stops, plus a 1.75 percent upfront charge of roughly $6,755 added to your balance. Same protection for the bank. Very different total cost to you.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
Mortgage insurance is not homeowners insurance and it is not mortgage life insurance. It does not protect your house, your family, or your payments. It protects the lender's money.
04Receipts
Every figure on this page is sourced to a primary document. Tap to open the original.