What is mortgage insurance? It’s a type of coverage that protects the lender—not the borrower—when a homebuyer makes a small down payment. If you’re planning to buy a home, you’ve probably come across the term “mortgage insurance.” But what exactly is it, and why might you need to pay for it? In this guide, we’ll break down everything you need to know about mortgage insurance, from how much it costs to when it’s required.
What’s the Point of Mortgage Insurance?
Mortgage insurance protects the lender if you stop making payments on your home loan. It doesn’t protect you, the borrower, but it makes it possible for you to get a mortgage with a lower down payment.
Lenders view loans with smaller down payments as riskier. Mortgage insurance reduces that risk, which allows lenders to offer loans to more borrowers.
When Do You Need to Pay Mortgage Insurance?
You typically need to pay mortgage insurance if:
- Your down payment is less than 20% on a conventional loan
- You’re getting a loan backed by the Federal Housing Administration (FHA), which always requires mortgage insurance
- You have a lower credit score or are considered a higher-risk borrower
Types of Mortgage Insurance
There are several types of mortgage insurance, each tied to the type of loan you get:
- Private Mortgage Insurance (PMI): For conventional loans, typically required with less than 20% down. PMI can often be canceled once you build enough equity in your home.
- Mortgage Insurance Premium (MIP): Required for FHA loans, MIP includes upfront and annual premiums. It may be required for the life of the loan, depending on your down payment.
- Lender-Paid Mortgage Insurance (LPMI): The lender covers the insurance cost but charges you a higher interest rate. It can’t be canceled.
- VA and USDA Loans: These government-backed loans don’t require mortgage insurance but may include other fees that serve a similar purpose.
How Long Do You Pay for Mortgage Insurance?
With a conventional loan:
- PMI is automatically removed when your loan-to-value (LTV) ratio reaches 78%
- You can request cancellation when your LTV hits 80%, if you’re in good standing
- Refinancing is another way to eliminate PMI
For FHA loans:
- If your down payment is less than 10%, MIP is required for the life of the loan
- If you put 10% or more down, you must pay MIP for at least 11 years
How Much Is Mortgage Insurance?
Mortgage insurance costs depend on several factors including your credit score, loan type, down payment size, and loan amount. On average, PMI for conventional loans ranges from 0.3% to 1.5% of the loan amount annually. The lower your credit score and down payment, the higher the cost is likely to be.
How Mortgage Insurance Affects Mortgage Interest Rates
Mortgage insurance doesn’t directly change your mortgage interest rate. However:
- Borrowers who require mortgage insurance may also face higher interest rates, especially if they have lower credit scores or smaller down payments
- Mortgage insurance increases your overall monthly mortgage cost, even if your base rate stays the same
- Loans with insurance often have less favorable mortgage rates than those without it
Understanding how mortgage insurance impacts your borrowing costs helps you make smarter comparisons between loan options.
Key Takeaways
- Mortgage insurance protects the lender—not the borrower—from loan default
- It enables buyers to qualify for a mortgage with less than 20% down
- There are different types: PMI, MIP, and LPMI
- Mortgage insurance can add to your monthly costs, but may be removed under certain conditions
- FHA loans typically require longer-term mortgage insurance than conventional loans
Need help figuring out if you need mortgage insurance? Talk to a lender or mortgage advisor to see how it applies to your unique situation.
Why a Home Inspection Matters Before Getting Mortgage Insurance
Before finalizing your mortgage and securing mortgage insurance, getting a home inspection is a smart step in the homebuying process. A thorough home inspection report can reveal potential issues that may affect the property’s value or safety—factors that can influence both your loan approval and the terms of your mortgage insurance. While mortgage insurance protects the lender, a home inspection helps protect you, the buyer, from unexpected repair costs after move-in.
