What is mortgage insurance?

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In a Nutshell

Mortgage insurance pays your lender if you default on your home loan. You typically have to pay mortgage insurance on a conventional loan if you put less than 20% down or if you take out an FHA loan.
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If you take out a home loan with a low down payment or through a government program, you might have to pay mortgage insurance.

Mortgage insurance protects the mortgage lender rather than you, the borrower. You’ll pay premiums to the insurer, which could be either a private company or a government agency, depending on the type of mortgage.

In return, the insurer agrees to pay the lender up to a specified amount if you fail to make payments on your mortgage as agreed. As a borrower, you’ll get no extra protection from mortgage insurance. You can still lose your home through foreclosure and hurt your credit scores if you default on your loan.

We’ll review the different types of mortgage insurance and look at how much it could cost you. We’ll also discuss how long you can expect to pay for different types of mortgage insurance and how to avoid mortgage insurance altogether.

What are the different types of mortgage insurance?

Mortgage insurance goes by different names for different types of home loans.

PMI on conventional loans

Lenders typically require private mortgage insurance, or PMI, for conventional loans if the down payment is less than 20% of the home’s purchase price. In most cases, you pay PMI through monthly installments. But there are a few other options.

You might be able to pay for PMI with a single large premium when you close on the loan, or roll the upfront premium into your loan. You’d then pay it off gradually as you make loan payments.

Another common option is the split premium. In that case, you pay part of your PMI upfront and the rest on a monthly basis.

Finally, there’s also lender-paid PMI. The lender pays this form of PMI for you but usually charges a higher interest rate as a result.

MIP for FHA loans

If you take out a government-backed FHA loan, you’ll typically be assessed a mortgage insurance premium, or MIP, in a couple of ways. First, you’ll pay an upfront MIP when you close on your loan. Then you’ll pay an annual MIP going forward.

Your upfront MIP payment will be equal to 1.75% of your loan. Your annual MIP will vary depending on factors such as your loan-to-value ratio and your base loan amount.

USDA guarantee fee

USDA loans don’t require mortgage insurance, but they do come with an upfront “guarantee fee” as well as an annual guarantee fee that serve the same purpose. These fees are usually included in your monthly loan payment.

VA funding fee

If you’re an eligible service member, veteran or qualifying military spouse, you may qualify for a VA loan, which doesn’t require mortgage insurance. Instead, the VA charges an upfront funding fee, which can be rolled into your loan.

The VA warns that if you add the funding fee and closing costs to your loan, rather than paying for them upfront, you could be left owing more than your house is worth.

Some borrowers may qualify for exceptions and won’t have to pay the funding fee, including borrowers in the following situations:

  • Borrowers who receive VA compensation for a disability related to their military service
  • Borrowers who are eligible for VA compensation for a disability related to their service and who receive retirement or active-duty pay
  • Surviving spouses who receive dependency and indemnity compensation

How much does mortgage insurance cost?

For some loan types, the characteristics of your mortgage determine how much you pay in mortgage insurance.

Conventional loans

The cost of PMI is based on a variety of factors, including the loan-to-value ratio of your mortgage, your credit scores and the length of your loan. Mortgage finance company Freddie Mac reports that PMI costs are typically $30 to $70 per month for every $100,000 of your loan amount.

You can estimate how much PMI you’ll owe by using Credit Karma’s PMI calculator.

FHA loans

The upfront mortgage insurance premium on your FHA loan will equal 1.75% of your loan amount. For example, if you borrow $200,000 for your mortgage, you’d make an upfront MIP payment of $3,500 when you close your loan.

The annual mortgage insurance premium depends on the size of the loan, loan term and down payment. Beginning in March 2023, the annual premium for new mortgages will range between 0.15% and 0.75%.

USDA loans

The USDA publishes standard guarantee fees and updates them regularly. As of February 2023, USDA loans have an upfront fee of 1% and an annual fee of 0.35%.

VA loans

The size of the VA funding fee depends on your loan amount and other factors, including whether you’re getting a purchase loan or refinancing as well as whether your loan is part of the Native American Direct Loan program.

The VA funding fee also varies depending on the size of your down payment — with higher fees for lower down payments. The fees are also higher if you’ve taken out a VA loan before.   

Depending on the various factors, the funding fees range between 0.5% and 3.6%.

How long do you need to pay mortgage insurance?

Given that mortgage insurance protects the lender rather than you and adds to your costs, you generally want to stop paying it as soon as you can. With some types of loans, you can get rid of mortgage insurance once you meet certain criteria. But other loans require you to pay mortgage insurance over the lifetime of the loan.

Conventional loans

If you opt for an upfront premium or lender-paid PMI on a conventional loan, then you generally can’t get that insurance removed.

But under the federal Homeowners Protection Act, you can request to have PMI removed once the remaining principal on your loan is 80% of the home’s original value. You’ll need to submit your request in writing, and you have to be up to date on your loan payments to qualify. You might also need to show that you don’t have a second mortgage on the property. And the lender may ask you to get an appraisal to confirm that your home’s value hasn’t gone down since you bought it.

Unless you’ve already gotten PMI removed, federal law requires your servicer to stop charging for PMI once your principal balance is at least 78% of the home’s original value. Again, this works only if you’re making on-time payments. If you’ve fallen behind on payments, you’ll still owe PMI until you’re caught up.

Alternatively, your servicer must end PMI when you’re halfway through the amortization schedule for your loan, as long as you’re on track with payments.

FHA loans

You’ll typically owe an upfront mortgage insurance premium plus an annual mortgage premium on an FHA loan. You can opt to finance the upfront premium, in which case you’ll pay it off with interest through your monthly payments.

To remove FHA mortgage insurance, first contact your lender to see what it requires to drop the insurance. Most lenders will want to see that you have a significant amount of equity in your home before they’re willing to remove the mortgage insurance premium.

Rules around removal of FHA mortgage insurance vary depending on your loan origination date, so lender flexibility may be limited.

For mortgages finalized on or after June 3, 2013, the length of time you owe the annual premium depends on the size of your down payment. If your down payment is under 10% of the home’s value, then you have to keep paying the annual premium for the whole term of the loan. But if you make a down payment of at least 10%, then you pay the annual premium for the first 11 years.

USDA loans

You’ll typically owe both an upfront guarantee fee and an annual fee on a USDA loan. You can choose to finance part or all of the upfront fee. If you do, you’ll pay the fee back over time with interest.

The annual fee applies for the life of the loan. You can stop paying it only if you pay off the mortgage early, if the lender forecloses on the home, or if the lender takes the home through a deed-in-lieu of foreclosure.

VA loans

The VA funding fee is a one-time fee, so you won’t owe any ongoing mortgage insurance on a VA loan. However, if you decide to roll the funding fee into your loan, you’ll gradually pay it off with interest through your loan payments.

What’s next?

A straightforward way to avoid paying mortgage insurance is to get a conventional loan and make a down payment of at least 20%. But you’ll want to budget for a down payment of this size because you’ll still need money for closing costs and moving expenses.

Some lenders offer piggyback loans that help bring your down payment to 20% to help avoid mortgage insurance. These loans may allow you to get out of paying PMI, but they can be costly and might not actually save you money in the long run. Plus, they can complicate the process of refinancing your loan later.

About the author: Sarah Brodsky is a freelance writer covering personal finance and economics. She has a bachelor’s degree in economics from The University of Chicago. Sarah has written for companies such as Hcareers, Impactivate and K… Read more.