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Mortgage Insurance Premium

DEFINITION

Premium payment by a borrower to a private mortgage company. The premium can be deducted from a borrower’s expenses.

EXPLANATION

Mortgage insurance premium is a monthly premium payment paid by a borrower to a private mortgage company. The premium can be deducted from a borrower’s expenses.

Mortgage insurance premium (MIP) is a type of insurance used when a borrower has an FHA loan with a loan to value ratio value of less than 20%. This often is the case when a borrower retains an FHA loan putting less than a 20% down payment. Lenders require the private mortgage insurance to ensure that in the event a borrower falls behind on payments and subjects themselves to a foreclosure, the lender will not lose out on their investment.

The private mortgage insurance will pay out the money the lender loses as a result of borrower default and foreclosure. FHA assesses the mortgage insurance premium either monthly, which would be paid at the time of the mortgage payment, or upfront on a yearly basis. Once the borrower has made enough payments to lower the principal amount to below the 20% equity threshold, the borrower will no longer be required to have private mortgage insurance. Loans originating prior to June 3, 2013 may be required to pay private mortgage insurance for five years.

Mortgage insurance premiums are tax deductible.

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