Mortgage Insurance Overview
Mortgage insurance is an extra monthly premium you pay to protect your LENDER (not you) if you default on your loan — it’s required when your down payment is less than 20%, and it costs $100-$400+/month on a typical mortgage.
It feels unfair because it is: you’re paying hundreds per month for insurance that only benefits the bank. But without it, lenders wouldn’t offer loans with less than 20% down, and most first-time buyers wouldn’t be able to buy a home at all. Think of it as the price of entry for low-down-payment mortgages.
How It Works by Loan Type
Conventional loans require Private Mortgage Insurance (PMI) when you put down less than 20%. PMI costs 0.5-1.5% of the loan amount annually. On a $300,000 loan, that’s $1,500-$4,500/year ($125-$375/month). The good news: PMI drops off automatically when you reach 22% equity, or you can request cancellation at 20%.
FHA loans require Mortgage Insurance Premium (MIP) regardless of down payment. There’s an upfront MIP of 1.75% of the loan ($5,250 on a $300,000 loan, usually rolled into the balance) PLUS an annual MIP of 0.55-1.05% ($1,650-$3,150/year). The bad news: if you put down less than 10%, MIP lasts the LIFE of the loan. You can’t get rid of it without refinancing into a conventional loan.
VA loans have no monthly mortgage insurance (a huge benefit). Instead, they charge a one-time funding fee of 1.25-3.3% of the loan. USDA loans have a 1% upfront guarantee fee plus a 0.35% annual fee — the cheapest mortgage insurance option.
The Real Dollar Impact
On a $350,000 home with 5% down ($17,500), here’s what mortgage insurance costs on a 30-year loan:
Conventional PMI: ~$175/month until you hit 20% equity (typically 7-10 years). Total cost: $14,700-$21,000 before it drops off.
FHA MIP: ~$180/month for the LIFE of the loan (if less than 10% down). Total cost over 30 years: $64,800. That’s why most FHA borrowers refinance to conventional once they have 20% equity.
Watch out: Lenders won’t remind you when you’re eligible to cancel PMI — you have to ask. Track your loan balance and home value. When your equity hits 20% (based on the original value or a new appraisal), submit a written cancellation request to your servicer. The CFPB says PMI must be automatically terminated at 22% equity, but that could mean paying months of unnecessary premiums if you don’t request cancellation at 20%.
Factor mortgage insurance into your total home buying budget. Use the property tax calculator to see how PMI affects your monthly payment. Some lenders offer “lender-paid PMI” where they cover the insurance cost in exchange for a higher interest rate — run the numbers both ways to see which is cheaper over your expected ownership period. Check your insurance options for full coverage details.
Can I avoid mortgage insurance entirely?
Three ways: put 20% down on a conventional loan, get a VA loan (if eligible), or use a piggyback loan (80/10/10 — 80% first mortgage, 10% second mortgage, 10% down). The piggyback option trades PMI for a higher-rate second mortgage, which is sometimes cheaper overall. Run the math with your lender for your specific situation.
Is FHA mortgage insurance or conventional PMI cheaper?
FHA MIP has lower monthly rates, but it lasts the life of the loan. Conventional PMI rates are slightly higher monthly but drop off at 20% equity. For most borrowers planning to stay long-term, conventional PMI is significantly cheaper overall. FHA makes sense if your credit score is below 680 or you can’t get conventional approval — but plan to refinance as soon as your credit and equity allow.