What is upfront MIP?
Upfront MIP refers to the upfront payment of “Mortgage Insurance Premium” to a particular housing loan availed. This means that the borrower will pay a certain amount to the lender at the time of loan availment. Under the rules of the FHA or Federal Housing Administration, mortgage insurance premiums are collected to protect the lenders from mortgage default. Along with the upfront MIP, lenders or banks also collect annual insurance premiums called annual MMI premiums or annual mutual mortgage insurance. For borrowers that provide equity of less than 20% of the total loan value, a monthly insurance called PMI or private mortgage insurance is also collected by the lender.
Upfront MIPs may vary between different lenders or banks, but the usual rate is around 1 to 2.25% of the total loan value. This is usually collected as a lump sum and not as staggered payments. Upfront mortgage insurance premiums also vary depending on other factors like LTV or the loan-to-value ratio. This ratio is used by lenders to assess the risks in allowing borrowers to avail a particular loan value. If the borrowers pay low equity, then the risk of mortgage default for lenders will go higher. This is the main reason why private mortgage insurance is necessary as protection for lenders in times of loan default. To get the loan-to-value ratio, one just needs to divide the total loan amount over the total property value. So if a borrower decides to apply for an 80,000 dollar loan on a 100,000 dollar property, the formula would be 80,000/100,000 and the result is 80%, which represents the loan-to-value ratio. Loan term or duration is also one factor that is considered in computing the upfront MIP rate. This upfront payment can also be settled in cash or may also be financed through the loan availed by the borrower.