Mortgage Insurance: What It Is and How Much It Costs

Low-down-payment mortgages usually require mortgage insurance, and the cost varies depending on how much you borrow and your credit.

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Updated May 13, 2024
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Saving up the traditional 20% to put down on a home can be a tall task, especially when you could be paying off student loan debt or keeping up with other financial responsibilities.

Loan programs that let you put down less than 20% could help you purchase a home faster, but these loans typically require some form of mortgage insurance. Learn what mortgage insurance is and who it benefits.

In this article

What is mortgage insurance?

Mortgage insurance is insurance that’s typically required when you start out with a loan-to-value ratio that’s greater than 80%. The LTV ratio is a percentage that represents how much of your home is financed by a loan. When you put down less than 20% of the home’s purchase price and have a high LTV, you’re starting out with less “skin in the game,” and the lender takes on more of the financial risk.

Mortgage insurance protects the mortgage lender by compensating the lender for some of its losses if a homeowner defaults on their home loan and goes into foreclosure. In other words, it helps the lender, but not you as the homeowner.

Conventional loans traditionally require 20% down, but some lenders may let you put down as little as 3% (an LTV of 97%) if you pay for private mortgage insurance or PMI. Not all loans with smaller down payments require mortgage insurance, however, so it's important to consider all your options as a homebuyer.

Note: It’s important not to confuse mortgage insurance with homeowners insurance. Home insurance protects your home and belongings; private mortgage insurance protects the lender.

What is PMI?

Paying for private mortgage insurance (PMI) may be a condition of taking out a low down payment conventional mortgage. How you pay the insurance depends on the insurance type. In some cases, you could pay the PMI as a lump sum at closing, or it may be included in your monthly mortgage payment.

For the 2021 tax year, you may be able to take PMI as a tax deduction. Keep in mind that this tax deduction opportunity may not be available for 2022 or beyond unless it’s extended.

How much is PMI?

The mortgage insurance cost you’ll pay can vary based on factors such as your credit score and down payment amount. In general, PMI payments may range from 0.50% to 1% of your mortgage each year.

Considering those figures, if you borrow $350,000 for a home, you might pay PMI premiums of $1,750 to $3,500 per year or $145.83 to $291.67 per month. If you borrow $500,000, you might have a PMI cost of $2,500 to $5,000 per year or $208.33 to $416.67 per month.

Although being able to pay a lower down payment upfront could open the doors to homeownership faster, it does come at a cost. The lower your down payment is, the higher your monthly payment may be because you’re borrowing more and there’s PMI on top of that.

Monthly and overall costs are something to consider when determining whether it makes financial sense to save up for a larger down payment. But it’s also worth noting that private mortgage insurance may not have to be paid forever.

Types of PMI

There are several types of private mortgage insurance you could pay when taking out a conventional loan. Here’s what you need to know:

Borrower-paid PMI

Borrower-paid PMI is mortgage insurance that’s paid for by the borrower. If it’s monthly PMI, you’ll pay in installments.

Lender-paid PMI

Lender-paid PMI is paid by the lender, but this doesn’t mean borrowers get off scot-free. Lenders may increase the mortgage loan interest rate to compensate for the cost. So if lender-paid PMI is available, it’s still a good idea to compare options in case you’re paying a higher interest rate.

Single premium PMI

Single-premium PMI is an upfront mortgage insurance premium paid at closing, but you could get help with the cost. For example, the seller or builder of your home could step in to help cover it.

Split premium PMI

Split-premium PMI is when you pay part of the premium upfront and part of it monthly. Sellers and builders may also pitch in to help you pay some of the upfront costs.

How does FHA mortgage insurance work?

Federal Housing Administration loans are insured by the government, and you’re required to pay a special type of mortgage insurance called mortgage insurance premiums. If you take out an FHA loan, you pay an upfront and annual mortgage insurance premium.

How much is FHA mortgage insurance?

The upfront MIP for an FHA loan is 1.75% of the loan. The monthly insurance premiums vary depending on your loan amount, loan term, and down payment. Here’s a breakdown:

For mortgage terms greater than 15 years
Loan amount Down payment Mortgage insurance premium
Less than or equal to $625,500 5% or more 0.80%
Less than or equal to $625,500 Less than 5% 0.85%
Greater than $625,500 5% or more 1%
Greater than $625,500 Less than 5% 1.05%
For mortgage terms less than or equal to 15 years
Loan amount Down payment Mortgage insurance premium
Less than or equal to $625,500 10% or higher 0.45%
Less than or equal to $625,500 Less than 10% 0.70%
Greater than $625,500 22% or higher 0.45%
Greater than $625,500 Less than 22% but equal to or greater than 10% 0.70%
Greater than $625,500 Less than 10% 0.95%
Data from the Department of Housing and Urban Development (HUD)

Here are a few examples to illustrate potential costs:

Say you buy a home with a $350,000 FHA loan, 3.5% down, and a 30-year term. You might pay $6,125 in upfront MIP. Your monthly premiums would fall into the 0.85% annual MIP category, which works out to $2,975 per year or $247.92 per month.

If you shorten the term and increase the FHA loan down payment, a $350,000 loan with 10% down and a 15-year term would likely require $6,125 in upfront premiums, but your annual rate would be 0.45%. This would work out to an annual premium of $1,575 and $131.25 per month.

Do VA loans have mortgage insurance?

VA loans don’t require mortgage insurance. They also typically don’t require a down payment. You do have to pay a VA funding fee in most cases, which you can pay in full at closing or roll into your loan.

The amount of the funding fee varies depending on your down payment and how many times you’ve used your VA loan benefits. If it’s your first time using a VA loan and you put down less than 5%, your funding fee will be 2.3% of the loan amount. If you put down 5% to 9%, it’s 1.65%, and if you put down 10% or more, your funding fee is 1.4%.

How do you get rid of mortgage insurance?

How and when you can get rid of mortgage insurance depends on the type of mortgage you have. In some cases, the mortgage insurance must stick around for the entire term.

For private mortgage insurance on conventional loans, the Homeowners Protection Act gives you the right to request an insurance removal when your LTV drops to 80% of your home’s value. If you don’t request it, private mortgage insurance must be automatically removed by the lender once your LTV reaches 78%.

Things are a bit different for FHA loans. You need to put at least 10% down on your FHA loan to qualify to have your MIP removed after 11 years. If you put less than 10% down, your MIP will stay for the life of your loan, but you could get it removed by refinancing.

If you have a loan with mortgage insurance (or you’re considering one), here are tips for getting rid of it:

  1. Focus on building home equity. The faster you pay down the balance on your conventional loan, the faster you might be able to request the removal of private mortgage insurance. If you have an FHA loan, paying down your balance could also help you qualify to refinance your mortgage to a new loan that doesn’t require insurance.
  2. Get your home appraised. If you have a conventional loan and the value of your home increases, so could your equity. Consider getting a home assessment done, and if it shows your equity is greater than 20%, you could refinance or request to get private mortgage insurance removed sooner.
  3. Refinance your loan. In some cases, refinancing will be the only way to remove insurance from an FHA loan. Refinancing is the process of taking out another loan with better terms and using it to pay off your old one. This could decrease your interest rate and remove PMI or MIP for monthly and overall savings. Just make sure to consider the closing costs involved with refinancing before going forward. If you end up leaving the home before the break-even point, you could end up paying more to refinance the loan than you actually save.


Is mortgage insurance a waste of money?

Mortgage insurance can increase your monthly payment, but it isn’t necessarily a waste of money. Despite the cost, low down payment loans with mortgage insurance may still be worthwhile for people without sizable savings who want to lay down roots and start building equity.

For example, many first-time homebuyers don’t have enough savings for a 20% down payment, and they may find it makes more sense to buy sooner and start building equity, even if they have to pay PMI.

That said, when it comes down to the actual dollars and cents of it all, putting down a larger down payment has some financial upsides. With more money down, you’ll start with more ownership stake in your home and your payment will likely be lower. Weighing the pros and cons of all options could help you make the best decision for your financial situation.

How long do you pay mortgage insurance?

With an FHA loan, you pay insurance for 11 years if you put down 10%. Mortgage insurance stays for the life of the loan if you put down less than 10%, but you could get rid of MIP by refinancing your loan once you have sufficient equity.

For conventional loans, you could request to remove mortgage insurance when your mortgage balance decreases to 80% of the home’s value. It may also be automatically removed when your loan balance drops to 78%.

What’s the difference between PMI and government-backed mortgage insurance?

Private mortgage insurance is offered by private insurance companies and insures conventional loans that are not part of government programs.

Government-backed mortgage insurance is provided by the government and backs specific programs, such as an FHA loan. In this scenario, the government is mitigating risk for the lender. If you default on the loan, the lender may file a claim with the government for its losses.

Bottom line

One of the most important steps when you’re learning how to get a loan is to get multiple quotes and compare mortgage rates. Each lender has its own criteria for what you may qualify for. You should also keep other expenses in mind such as your homeowners insurance coverage and property taxes.

Checking out our roundup of the best mortgage lenders could help you get a feel for what lenders have to offer. Many of these lenders provide conventional and government-backed loans with online applications and highly-rated customer service. Within a few minutes, you could have a short list of lenders to explore for your next purchase or refinance.

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Author Details

Taylor Medine

Taylor Medine is a freelance writer who's covered all things personal finance for the last seven years. She enjoys writing financial product reviews and guides on budgeting, saving, repaying debt, and building credit.