How do PMI and MIP differ and what affects their termination?

• A. PMI is mortgage interest; MIP is property insurance; both cancel automatically at 5 years.
• B. PMI is private mortgage insurance on conventional loans and can be canceled when equity reaches certain levels; MIP is FHA mortgage insurance and cancellation rules depend on the program and loan term.
• C. PMI applies to FHA; MIP applies to conventional; both never cancel.
• D. PMI is insured by the lender; MIP by the borrower; both canceled when loan paid off.

Answer: (B)

PMI and MIP are both forms of mortgage insurance, but they apply to different loan types and have different termination rules. PMI is private mortgage insurance on conventional loans. It protects the lender if you default and can be canceled once you’ve built enough equity—typically automatic when the loan balance reaches about 78% of the original property value, as long as you’re current on payments, or you can request cancellation near 80% LTV if your payments are current and the lender agrees. MIP, on the other hand, is the FHA mortgage insurance premium. Its cancellation isn’t universal; it depends on the specific FHA program and the loan term, so some FHA loans require MIP for part or all of the loan, or even for the life of the loan, unless you refinance or meet those program-specific rules. The answer reflects this difference and the fact that PMI cancellation follows a more standardized equity-based trigger, while MIP cancellation depends on the FHA program in use.