Mortgage insurance protects the lender, not you, if you default on your home loan.
Jump to insightYour interest rate, loan-to-value ratio, loan term, credit score and property type affect your mortgage insurance rates.
Jump to insightPrivate mortgage insurance is required for conventional loans when the buyer pays less than a 20% down payment.
Jump to insightYou can remove PMI by reaching 20% equity and requesting cancellation, or it automatically terminates at 78% loan-to-value.
Jump to insightWhat is mortgage insurance?
Mortgage insurance is a financial protection product that lenders require from homebuyers who make down payments of less than 20% of the property's purchase price. This insurance compensates lenders for taking on additional risk when buyers have minimal equity in their homes.
The coverage comes in different forms depending on your loan type: PMI for conventional loans, mortgage insurance premiums (MIP) for FHA loans, guarantee fees for U.S. Department of Agriculture (USDA) loans and funding fees for Department of Veterans Affairs (VA) loans.
While mortgage insurance increases your monthly housing costs, it enables you to purchase a home sooner without saving for a large down payment. This requirement helps lenders feel comfortable approving mortgages for borrowers who might otherwise struggle to qualify for home financing.
Who does private mortgage insurance protect?
Despite paying the premiums yourself, mortgage insurance protects the lender, not you as the borrower. If you default and your property enters foreclosure, the insurance policy reimburses your lender for financial losses after the home is sold.
This protection differs fundamentally from homeowners insurance, which covers damage to your property, and mortgage protection insurance (aka mortgage life insurance), which pays off your loan if you pass away.
Understanding this distinction is crucial: Mortgage insurance exists to serve the lender's interests, though it does provide the indirect benefit of helping you qualify for a home loan with a smaller down payment.
How does mortgage insurance work?
Lenders require private mortgage insurance when financing buyers considered higher risk — typically those making down payments below 20% of the purchase price. Policies are issued to banks and other financial institutions in the U.S. to protect against losses from foreclosures and defaults.
Remember, even though you might be required to pay mortgage insurance, it does not benefit you, and you should remove it when possible to save money.
Payments are due in monthly installments, usually until the borrower has gained 20% or more equity. PMI could also fall off once the balance of your loan hits 78% LTV based on the original appraisal or if the borrower is halfway through the life of their loan.
Factors that affect your mortgage insurance rate
PMI is calculated based on your interest rate, loan-to-value (LTV) ratio, loan term, credit score and other risk factors. This amount is added to the overall expenses that make up your mortgage payments, or PITI (principal, interest, taxes and insurance).
Here’s how each factor determines your specific rate:
- Credit score: Borrowers with scores above 760 typically qualify for the lowest premiums, while those below 680 face substantially higher costs.
- LTV ratio: Putting down 15% results in lower rates than a 5% down payment, as lenders view higher equity as less risky.
- Loan term: 30-year mortgages generally carry higher mortgage insurance costs than 15-year loans due to extended risk exposure.
- Property type: Single-family homes usually have lower premiums than condominiums or multiunit properties, which lenders consider riskier investments. Some lenders also charge different rates for investment properties versus primary residences.
Lenders recalculate premiums annually, so you might see your costs go down each year as you continue to pay off the loan and your LTV ratio improves.
Types of mortgage insurance by loan program
PMI and mortgage insurance premiums (MIP) are two types of mortgage insurance that homeowners may be required to pay, but they apply to different types of loans and have different rules.
If you are wondering if USDA or VA loans require mortgage insurance, the answer is: sort of. Both loan types charge fees that act similarly to mortgage insurance.
PMI for conventional mortgages
PMI applies to conventional loans — meaning those backed by private entities and not the government. The cost of PMI can vary but is usually between 0.5% and 1% of the loan amount annually.
Borrower-paid mortgage insurance (BPMI) and lender-paid mortgage insurance (LPMI) are two different ways of paying for PMI.
- BPMI is a traditional method where the borrower pays the monthly premium until they can cancel PMI.
- For LPMI, the lender pays the PMI premium upfront, but this cost is typically passed onto the borrower through a slightly higher interest rate on the mortgage, and it cannot be canceled.
» COMPARE: Best mortgage lenders
MIP for FHA loans
MIP is required on all FHA loans, regardless of the down payment amount. The cost of MIP can vary based on the loan amount and term, but it typically includes an upfront premium of 1.75%, plus an annual premium ranging from 0.45% to 1.05%. Unlike PMI, MIP cannot be removed from an FHA loan unless you refinance into a conventional loan.
While MIP is an ongoing annual charge, you will also pay an upfront mortgage insurance premium (UMIP), a one-time charge that you pay at closing.
» COMPARE: Best FHA loan lenders
USDA guarantee fee
USDA loans, while not requiring traditional PMI, do have an upfront guarantee fee and an annual fee. The upfront guarantee fee is equal to 1% of the loan amount, and the annual fee is 0.35% of the loan balance.
» COMPARE: Best USDA lenders
VA funding fee
VA loans require a funding fee, which can range from 1.4% to 3.6% of the loan amount, depending on factors like the borrower's military service details, down payment and whether it's the borrower's first time using a VA loan.
Not everyone has to pay this fee. Some veterans and spouses are exempt, such as those receiving VA compensation for a service-connected disability.
» COMPARE: Best VA loan lenders
How to remove or avoid PMI
You have several strategies to remove PMI from your mortgage or avoid it altogether. Federal law requires lenders to automatically terminate PMI once your loan balance reaches 78% of the home's original value, but you can request cancellation earlier once you hit 20% equity.
To cancel mortgage insurance before automatic termination, contact your lender and request removal. You'll typically need a current appraisal confirming your home's value and a good payment history.
Refinancing offers another path to remove PMI if your home has appreciated significantly. When your property value increases, refinancing into a new loan with a lower LTV ratio can eliminate the need for mortgage insurance, though you'll need to weigh closing costs against potential savings.
“Most consumers are not aware that when your equity builds, you can remove your mortgage insurance without refinancing your home,” said Michelle Taylor, a loan originator with the lender Gold Financial Services. “You can call your current lender to get instructions on how to remove the mortgage insurance."
To avoid PMI entirely from the start, consider these options:
- Make a 20% down payment: The most straightforward way to bypass mortgage insurance requirements.
- Use a piggyback loan: Take out a second mortgage (often 10% of the purchase price) alongside your primary loan to reach the 80% LTV threshold without PMI.
- Seek lender-paid mortgage insurance: Some lenders offer to pay your PMI in exchange for a slightly higher interest rate, which may provide tax advantages since mortgage interest is deductible.
How to calculate mortgage insurance rates
You can get a rough idea of how much your mortgage insurance would cost with the following calculations. Keep in mind that some loan types might have upfront mortgage fees to consider, too.
- Determine your mortgage insurance rate: The cost of mortgage insurance depends on your LTV and credit score. With a lower LTV and higher score, you can expect a lower mortgage insurance rate. Your lender should be able to give you an exact number.
- Calculate your annual mortgage insurance cost: Multiply your loan amount by your mortgage insurance rate to find your annual mortgage insurance cost. If your loan is for $400,000 and your mortgage insurance rate is 0.5%, your annual cost would be $2,000.
- Calculate your monthly mortgage insurance cost: To find out how much mortgage insurance will cost you per month, simply divide your annual cost by 12. In this case, $2,000 divided by 12 gives a monthly cost of about $167.
FAQ
How long do you have to pay mortgage insurance?
For FHA loans, MIP lasts for 11 years or the life of the loan, depending on when you took your mortgage out. For PMI, you can request the servicer cancel it when your loan balance reaches 80% of the original home value (20% equity).
The servicer must automatically cancel PMI once the loan balance falls to 78% of the original home value. It must also cancel PMI once you’re halfway through your loan term.
How much does mortgage insurance cost?
The cost of mortgage insurance varies depending on the type of loan, the amount of the down payment, and the borrower's credit score. For conventional loans, PMI typically ranges from 0.5% to 1.5% of the original loan amount per year. FHA loans charge 0.45% to 1.05% annually plus a 1.75% upfront premium.
Does PMI decrease over time?
Yes, a borrower's yearly premiums get recalculated on an annual basis based on the size of your loan. As the principal balance decreases, so does PMI.
Is mortgage insurance mandatory?
Mortgage insurance is only mandatory when you make a down payment of less than 20% on a conventional loan or take out an FHA loan regardless of your down payment amount. Lenders require this coverage to protect themselves against potential losses if you default.
How much is mortgage insurance on a $300k loan?
On a $300,000 loan, mortgage insurance typically costs between $125 and $375 per month, or $1,500 to $4,500 annually. The exact amount depends on several factors: your credit score, down payment size, loan term and property type.
For example, a borrower with excellent credit (760-plus) making a 10% down payment might pay around 0.5% annually ($1,500 per year or $125 monthly), while someone with a 680 credit score and only 5% down could pay 1.5% annually ($4,500 per year or $375 monthly).
Article sources
ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
- U.S. Department of Veteran Affairs, “VA funding fee and loan closing costs.” Accessed Oct. 17, 2025.
- Consumer Financial Protection Bureau, “What is private mortgage insurance?” Accessed Oct. 17, 2025.
- Consumer Financial Protection Bureau, “What is mortgage insurance and how does it work?” Accessed Oct. 17, 2025.
- My Home by Freddie Mac, “Breaking down PMI.” Accessed Oct. 17, 2025.
