Mortgage insurance is a premium you pay so that your lender is reimbursed if you default and the home sells for less than what you owe on it. Lenders require mortgage insurance whenever your down payment is less than 20% of the purchase price, because a loan covering more than 80% of a home’s value leaves almost no cushion if the market dips or the borrower stops paying. The premium typically adds somewhere between 0.4% and just over 1% of your loan balance to your annual housing costs, depending on the loan type and your credit profile. In exchange, you get access to a mortgage you would otherwise be turned down for.
Who Mortgage Insurance Actually Protects
This is the part most borrowers misunderstand. Mortgage insurance protects the lender, not you. If you fall behind on payments, the policy will not cover your missed payments, and it will not stop a foreclosure. The beneficiary of any payout is always the lender or the agency backing the loan.
You pay the premium. Someone else collects if things go wrong. That structure is why mortgage insurance sits in a different category from homeowners insurance or life insurance, both of which pay you or your family when a covered event occurs.
Why Lenders Require It Below 20% Down
Homes can lose value. A bank holding a loan worth 95% of a property’s price has almost no margin for error if prices drop or the borrower defaults and the home sells at a loss. Without a way to offload that risk, most lenders would simply refuse to approve any mortgage where the buyer put down less than 20%.
Mortgage insurance breaks that stalemate. By shifting the default risk to an insurer, lenders can approve higher loan-to-value mortgages and still expect to be made whole if the loan goes bad. That is what makes it possible for buyers with steady income but limited savings to purchase a home without waiting years to accumulate a full 20% down payment.
The 20% threshold is not arbitrary. It is the equity cushion lenders consider large enough to absorb a normal market downturn without exposing them to loss. Once your equity crosses that line, the insurance is no longer needed and, on most loans, comes off.
What It Costs and What Drives the Price
Annual premiums on a conventional loan generally run from about 0.4% to over 1% of the loan amount. On a $350,000 mortgage, that works out to roughly $1,400 to $3,500 per year on top of principal, interest, taxes, and homeowners insurance.
Your rate reflects how risky the insurer thinks your loan is. The main factors:
- Credit score
- Down payment size
- Debt-to-income ratio
- Loan type and term
A buyer putting 3% down with a credit score below 680 pays substantially more than someone putting 15% down with excellent credit. The insurer is essentially pricing a bet on whether you will keep paying, and the numbers move with the strength of your file.
Payment usually happens through escrow. Your lender estimates your annual premium, divides by twelve, and rolls that amount into your monthly mortgage payment along with property taxes and homeowners insurance. Some borrowers pay the premium upfront at closing instead, or use a hybrid of an upfront charge and reduced monthly amounts.
The Different Forms of Mortgage Insurance
The name and structure change depending on who is backing your loan.
Private Mortgage Insurance on Conventional Loans
Private mortgage insurance, or PMI, is what you pay on a conventional loan when your down payment is under 20%.1Fannie Mae. What to Know About Private Mortgage Insurance A private insurer provides the coverage, your lender arranges it, and the premium is baked into your monthly payment. PMI is the version borrowers can most easily get rid of once they build enough equity.
FHA Mortgage Insurance Premium
FHA loans carry two separate insurance charges. There is an upfront mortgage insurance premium of 1.75% of the loan amount, usually financed into the loan balance at closing. Then there is an annual premium paid monthly, running from 0.15% to 0.75% depending on your loan term, loan amount, and down payment.2U.S. Department of Housing and Urban Development. Mortgagee Letter 2023-05 For a standard 30-year FHA loan at or below $726,200, the annual premium is 0.50% to 0.55%.
The bigger issue with FHA insurance is duration. If your down payment was under 10%, the annual premium stays on the loan for its entire term. Put 10% or more down and the premium drops off after 11 years.2U.S. Department of Housing and Urban Development. Mortgagee Letter 2023-05
VA Funding Fee
VA loans do not carry mortgage insurance at all. Instead, eligible veterans and service members pay a one-time funding fee that serves the same underlying purpose of offsetting program costs.3Veterans Affairs. VA Funding Fee And Loan Closing Costs The fee is a percentage of the loan amount and depends on your down payment and whether you have used a VA loan before. First-time users with less than 5% down pay 2.15%; the rate drops with a larger down payment and rises for subsequent uses. Veterans with service-connected disabilities are exempt.4U.S. Department of Veterans Affairs. Funding Fee Schedule for VA Guaranteed Loans Because there is no ongoing monthly insurance charge, VA loans remain one of the most cost-effective options for eligible borrowers.
USDA Guarantee Fee
USDA loans for rural homebuyers use a guarantee fee with two components: an upfront fee and an annual fee. The statutory ceilings are 3.5% upfront and 0.50% annually, though actual rates are set each fiscal year.5U.S. Department of Agriculture. USDA Single Family Housing Guaranteed Loan Program – Upfront Guarantee Fee and Annual Fee The rates in effect since fiscal year 2017 have been 1% upfront and 0.35% annually, but you should confirm the current numbers with your lender, since USDA publishes updated fees at the start of each fiscal year in October.6U.S. Department of Agriculture. Upfront Guarantee Fee and Annual Fee Single Family Housing Guaranteed Loan Program
When You Can Stop Paying
Mortgage insurance is not always permanent, but the rules for getting out from under it depend entirely on the loan type.
Canceling PMI on a Conventional Loan
The Homeowners Protection Act gives you two paths to remove PMI from a conventional loan.7Consumer Financial Protection Bureau. Homeowners Protection Act Examination Procedures
The first is borrower-requested cancellation. Once your loan balance is scheduled to reach, or actually reaches, 80% of the home’s original value, you can submit a written request to your loan servicer.8Office of the Law Revision Counsel. 12 U.S. Code 4901 – Definitions You need to be current on payments, have a good payment history, certify there is no second lien on the property, and show that the home has not lost value since purchase.9Office of the Law Revision Counsel. 12 USC 4902 – Termination of Private Mortgage Insurance The lender may require an appraisal, typically $425 to $1,200.
The second is automatic termination. If you never ask, your servicer must terminate PMI once your balance is scheduled to reach 78% of the original property value, provided you are current on payments.8Office of the Law Revision Counsel. 12 U.S. Code 4901 – Definitions This runs off the amortization schedule, so extra payments alone will not accelerate the date without a formal cancellation request.
As a backstop, PMI must come off by the midpoint of the loan’s term regardless of the balance, as long as you are current. On a 30-year loan, that is year 15.10Office of the Law Revision Counsel. 12 U.S. Code 4902 – Termination of Private Mortgage Insurance
Government-Backed Loans
FHA annual mortgage insurance cannot be canceled early on loans with less than 10% down. The only realistic way out is to refinance into a conventional mortgage once you have at least 20% equity, which drops the mortgage insurance requirement entirely. Loans with 10% or more down shed the annual premium after 11 years.2U.S. Department of Housing and Urban Development. Mortgagee Letter 2023-05
VA and USDA loans have no ongoing insurance premium to cancel. Their charges are one-time fees paid at closing, so there is nothing to remove later.
One Product That Sounds Similar but Isn’t
Mortgage insurance is often confused with mortgage protection insurance, or MPI, and the two work in opposite directions. Mortgage insurance protects the lender against your default. MPI is an optional life-and-disability product that pays your mortgage if you die, become disabled, or lose income due to a covered event, with you or your estate as the beneficiary. MPI is sold by life and disability insurers and has nothing to do with the PMI requirement tied to your down payment. If a lender is requiring insurance because you put down less than 20%, that is mortgage insurance, and buying an MPI policy will not satisfy it.