What Is Mortgage Insurance?

Written by Elijah BishopReviewed by Nathan Brown, CFP®Updated: 13th Apr 2022
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According to the National Association of Realtors, the average down payment by first-time home buyers was 6 percent.

And for all types of home buyers, the figure hovered around 12 percent. If you’re like the average home buyer and plan to make a down payment of less than 20%, then you should be prepared to pay for mortgage insurance.

In this article, we’ll walk you through what mortgage insurance is, when it is required, how long you have to pay for it, and how much it will cost.

What is Mortgage Insurance?

Mortgage insurance is an insurance policy that protects a mortgage lender if the borrower defaults to repay their mortgage loan, passes away, or cannot fulfill the necessary loan obligations.

Generally, the term mortgage insurance may include Private Mortgage Insurance (PMI), Mortgage Insurance Premium (MIP), and Mortgage Title Insurance.

These three insurance policies have in common that they protect the lender’s investment in the event of specific cases of loss.

More importantly, mortgage insurance makes it easier for potential homebuyers who cannot save for the conventional 20% to get their foot in the door of homeownership. In exchange, borrowers may have to pay insurance premiums monthly for a certain period.

How Does Mortgage Insurance Work?

While you’re responsible for the payment of mortgage insurance, it, however, protects the mortgage lender and not you.

Typically, mortgage insurance pays the lender a part of the principal if you default in making your mortgage payments.

However, you’re still responsible for the mortgage and could lose your home in foreclosure if you default on the payment multiple times.

Most mortgage insurance policies may require a monthly payment or a single lump-sum payment made at the time of closing.

If you’re like millions of homeowners paying for one form of mortgage insurance or the other, you can request that the insurance policy be canceled once you achieve at least 20% equity in your home.

How Much Is Mortgage Insurance?

Your mortgage insurance cost depends on the type of loan and mortgage insurance that comes with the loan.

However, our research reveals that you can expect to pay an average of $30 – $70 per month for every $100,000 you borrow.

Typically, your mortgage insurance premium will depend on the following factors:

How Is Mortgage Insurance Calculated?

It is common for lenders to calculate your potential mortgage insurance premium rate based on certain factors.

These factors may include your credit score and down payment amount. However, the average mortgage insurance rate is generally 0.5%-1.5% of your loan amount.

Details of your mortgage insurance rate are always included in your loan estimate and closing disclosure.

So, let’s say you made a down payment of 10% on a $350,000 home, leaving you with a $315,000 conventional loan.

If the insurance provider is charging you 1%, your annual PMI premium will be $3,150. Typically, your lender may decide to combine the monthly PMI fee of $262.5 with your mortgage payments.

And since annual mortgage insurance is re-calculated every year, you should expect your PMI cost to decrease as you pay off the loan. More importantly, mortgage insurance is always calculated as a percentage of the mortgage loan and not the home purchase price.

How To Avoid Mortgage Insurance

If you’re getting an FHA loan, then you’re bound to pay for mortgage insurance. This also applies when you put down less than the required 20% with conventional loans. However, you may be able to avoid mortgage insurance via the following methods:

  • Save up for a large down payment (in the case of a conventional loan)
  • Opt. for a less expensive home and mortgage
  • Find low-down payment loans that don’t require PMI like PMI Advantage from Quicken Loans

Aside from the above ways to avoid mortgage insurance, several government-backed home loans allow you to avoid mortgage insurance. These loans include:

VA Loans

Backed by the Federal Department of Veteran Affairs, VA loans do not require mortgage insurance.

So, if you’re a serving member of the US military, served in the military, or a military spouse, then you can take advantage of this zero down payments and mortgage insurance-free loan.

However, VA loans require a VA funding fee between 1.4% – 3.6% of the loan amount.

>> More: Best VA Mortgage Lenders

USDA Loans

USDA loans are designed to cater to individuals looking to purchase a house in a rural area.

USDA loansare backed by the United States Department of Agriculture and do not require borrowers to carry mortgage insurance no matter their down payment.

However, just like VA loans, USDA loans require an upfront fee of 1% of the loan amount and an annual fee of 0.35% that acts as its form of mortgage insurance.

Private Mortgage Insurance vs. Mortgage Insurance Premiums

While PMI and MIP are both mortgage insurance policies that protect a lender if a borrower defaults in the repayment of their mortgage, there are several differences between them.

Private Mortgage Insurance (PMI)Mortgage Insurance Premium
PMI is required when conventional loan borrowers make a down payment of less than 20% of their potential home purchase priceWhile FHA requires a 3.5% down payment, it requires an upfront MIP and an annual insurance premium regardless of the down payment.
You may be able to cancel PMI once you achieve 20% equity in your home value.With FHA MIP, you may be required to pay insurance premiums for the life of the loan. However, if you put over 10% down, you will have to pay MIP for 11 years.
Your credit score influences the private mortgage insurance rate that you receive. A lower FICO score will result in a higher PMI rate.Your credit score doesn't influence the MIP rate you will receive from your lender.

How Long Do You Have to Pay for Mortgage Insurance?

The good news is that with private mortgage insurance, you only need to pay for PMI premiums until you have at least 20% equity in your home.

Typically, your lender will cancel your PMI wants you to hit your 22% homes equity mark.

However, with FHA loans, you may have to pay for MIP throughout the life of the loan unless you put down over 10%, which allows you to cancel MIP after 11 years.

How to Get Rid of Mortgage Insurance

The process of getting rid of the mortgage insurance will depend on the type of insurance policy you have.

If you have a conventional mortgage with the standard borrower-paid monthly payment, you can get rid of PMI after you have reached the 20% equity threshold in your home. However, you can also get rid of PMI if you meet the following target:

Your home value has appreciated enough to give you up to 25% equity in your home, and you’ve paid PMI for at least 2 years.

Your home value has appreciated enough to give you up to 20% equity in your home, and you’ve paid PMI premiums for at least 5 years.

You make extra payments on your mortgage principal monthly to hit the 20% equity earlier.

Once you can achieve one or all of these, you will need to write to your lender to cancel PMI. If you’re writing to cancel PMI due to an increased home value, your lender may request a new appraisal to find your home’s current value.

More importantly, you will need to be punctual in your mortgage payments and have an outstanding loan payment history for your lender to grant your PMI cancelation request.

Bottom Line: What Is Mortgage Insurance?

Mortgage insurance is an additional expense you should budget for if you plan to put less than 20% on a conventional mortgage loan.

While there is a wrong misconception about mortgage insurance, it comes with its benefits. Not only does mortgage insurance help homebuyers purchase a home even with a low down payment, but it is also a wealth-building tool.

Before opting for a mortgage loan, check with your online mortgage lender to find out the type of mortgage insurance, rates, and repayment term associated with your desired type of home loan.

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Elijah Bishop
Elijah Bishop

Elijah A. Bishop is a Senior Personal Finance Writer who has been writing about real estate and mortgages for years. He has a Bachelors of Arts Degree in Creative writing from Georgia State University and has also attended the Climer School of Real Estate. He also holds a realtor license and has been in and out of the US mortgage industry as a loan officer. Bringing over 15 years of experience, Elijah produces content that analyzes ethnicities, race, and financial well-being. His areas of expertise are mortgages, real estate, and personal loans.