How is the MIP calculated?

The correct approach to calculating the Mortgage Insurance Premium (MIP) is as a percentage of the loan amount. This method is commonly used in various mortgage programs, particularly FHA loans, where MIP serves to protect lenders in case of borrower default.

By using a percentage of the loan amount, MIP adjustments can be reflective of the size of the loan itself, ensuring that larger loans carry higher insurance costs, which corresponds logically to the increased risk amount. This structure also supports the administration of premiums, allowing for more straightforward underwriting and consistency in premiums across different loans.

The flat fee option would not accurately account for the variability in loan sizes, making it less equitable across different borrowers. Additionally, while borrower credit scores can influence the terms and costs of a loan, they do not specifically determine MIP calculations, nor does the loan length play a direct role in its determination. Thus, basing MIP on the loan amount as a percentage represents a clear and effective method of establishing the appropriate premium for mortgage insurance.