Mortgage insurance premium (MIP)

MIP is the mortgage insurance charged on FHA loans, distinct from the PMI charged on conventional loans. It comes in two parts: an upfront premium (UFMIP) of 1.75% of the loan amount paid at closing and typically rolled into the financed balance, plus a monthly premium of roughly 0.50% to 0.85% of the loan amount annually.

How it works: the monthly MIP is calculated as the loan balance times the annual MIP rate, divided by 12, and added to the regular mortgage payment. The annual rate depends on the loan amount and the original LTV. Unlike conventional PMI, MIP doesn't auto-cancel at 78% LTV. For loans with original LTV greater than 90% (which is most FHA loans, given the 3.5% down minimum), MIP stays for the life of the loan. For loans at or below 90% LTV, MIP drops off after 11 years.

Why it matters: the "MIP for life" rule is the most consequential hidden cost of FHA financing. Over a 30-year term it adds tens of thousands of dollars compared to a conventional loan that drops PMI at year 7 or 8. Many FHA borrowers eventually refinance to conventional once enough equity has built up, specifically to escape lifetime MIP.

Common gotcha: FHA borrowers sometimes assume MIP works like PMI and will cancel automatically when they hit 80% equity. It doesn't. The HPA cancellation rules apply only to conventional PMI, not to FHA MIP. Confirming the MIP duration on the Loan Estimate (which states "MI for life of loan" or "MI for 11 years") matters at the moment of choosing the loan program.