You might have some questions regarding mortgage insurance if you are buying a house and putting down less than 20%. What is the purpose of mortgage insurance? Who provides it? And why is it that you pay for it?
All those questions are valid, and the real answer is that mortgage insurance is very poorly explained by the mortgage industry. Many people do not clearly understand its purpose because it is often included with homeowners insurance in closing papers and is sometimes confused with life insurance for homeowners.
This guide has been created to help you understand mortgage insurance, the various types of mortgage insurance, the costs associated, and most importantly, how to eliminate your obligation to pay for mortgage insurance when you no longer need it.
What is Mortgage Insurance?
Mortgage insurance is an insurance policy designed to protect the lender if the borrower defaults on the loan. Typically, it’s required when you borrow more than 80% of the value of your home, or when you put down less than 20% of the value of your home.
Now let’s examine this from the borrower’s perspective. If you put 3% down on the home, your lender has just loaned you 97% of the purchase price. If the value of your home declines and you default on your mortgage, your lender must sell your home, and may be forced to sell your home at less than the original purchase price. Mortgage insurance pays the difference. It’s the lender’s “insurance policy,” and the borrower must pay for it.
In summary, mortgage insurance provides protection for the lender, who, as you can see, is taking a high risk loan when they provide higher than 80% financing.
Simple definition: It protects the lender from loss (default) and is paid for by the borrower. Mortgage insurance is typically required on a loan when your loan-to-value ratio is greater than 80%.
For conventional loans, mortgage insurance is referred to as Private Mortgage Insurance (PMI), while FHA loans use a different form of mortgage insurance called Mortgage Insurance Premium (MIP). These two forms of insurance operate differently from one another, have different costs, and have different processes for being removed, which will be discussed further on in the article.
As a clarification, mortgage insurance is not the same as homeowner’s insurance. Homeowner’s insurance covers damage to your property and personal property as a result of fire, theft, and other types of loss. Mortgage insurance protects the lender only. You will most likely have to have both types of insurance when you make a down payment of less than 20%.
Everything You Need to Know about Mortgage Insurance
In some cases when acquiring a house with minimal deposit, an additional expense called mortgage insurance may need to be paid by you (the borrower). This protects the lender if you default on repaying the loan. If you use a conventional loan and make less than 20% down payment, your mortgage insurance will be called private mortgage insurance (PMI) and will usually apply. If you are using an FHA loan, it will be called mortgage insurance premium (MIP).
In addition, while mortgage insurance adds to the amount of your monthly payment, it allows you to obtain your dream home immediately instead of having to wait YEARS for enough money to make a large enough down payment. In most circumstances, once you have gained enough equity in your home, the PMI will be able to be dropped.
Why Do Lenders Require It?
The 80% threshold of best mortgage protection insurance isn’t random. Research into lending history over decades indicates that borrowers that have less than 20% equity in their property (2% –3% equity) are statistically more likely to default on their mortgage. When an individual has more “skin in the game,” then they are less likely to default and work harder at making the payment.
Without home mortgage insurance, there would be no mortgages available for buyers with lower down payments. While mortgage insurance allows more individuals to purchase homes than would be possible without mortgage insurance and would require 20% down. Factually, the mortgage insurance cost per month adds to the monthly payment amount until there is enough equity.
PMI vs MIP: What is the Difference?
PMI and MIP both provide mortgage insurance. However, they apply to different types of loans (FHA or conventional), the cost of PMI versus MIP is different as well, and the cancellation of PMI versus MIP is also different. If these items mix up, it can be a costly mistake, especially with an FHA loan and eventually FHA mortgage insurance.
Conventional
PMI
- Type of loan: Conventional (Fannie Mae or Freddie Mac)
- When PMI applies: A down payment of less than 20% is required.
- Cost: The MIP amounts normally range between .2% and 1.5% per year based on the borrower’s credit score/use of their home, amount financed/loan amount.
- Who pays the cost: The borrower pays for PMI (usually paid monthly).
- Cancellation: PMI may be cancelled when the borrower has reached an 80% loan-to-value (LTV) ratio; at a 78% LTV ratio, PMI must be cancelled by the lender.
FHA Mortgage Insurance
MIP — Mortgage Insurance Premium
- Type of loan: FHA (government backed)
- When MIP applies: A down payment is a must on every FHA loan.
- Cost: Monthly payment of 0.15% to 0.75% of the loan amount per year and an upfront premium of 1.75% of the loan amount at closing.
- Cancellation: Loans from the FHA that have been assigned case numbers after June 3, 2013 come with an annual MIP for the duration of that loan if the original loan to value ratio is greater than 90%. If your original LTV is less than 90%, the MIP will continue to accrue for up to 11 years after the loan closes.
- Removal of MIP: Refinance into a conventional loan.
FHA loan mortgage insurance trap: If you have less than 10% down payment on an FHA loan, your MIP will remain for the lifetime of your loan regardless of how much equity you have built up (over 20% equity). You only get out of this situation by refinancing to a conventional loan. Many borrowers do not find out until years later when they are in repayment.
Other Types Worth Knowing
In addition to the two major types of mortgages, there are additional variations of mortgages that you may come across:
| Type | LoProgram | Notable Features | Cancellable |
|---|---|---|---|
| PMI (Borrower-Paid) | Conventional | Added to monthly payment | Yes, at 80% LTV |
| MIP (FHA) | FHA | Upfront + monthly, may be permanent | Limited |
| USDA Guarantee Fee | USDA Rural | Called a guarantee fee not MI | No |
| VA Funding Fee | VA Loans | One-time fee | N/A |
| Lender-Paid PMI | Conventional | Lender absorbs cost; raises your rate | No |
| Single-Premium PMI | Conventional | Paid upfront at closing | Partially refundable |
What Does Mortgage Insurance Actually Cost?
All lenders will have different ways they price their loans because they use their own formulas. All of these formulas will have different factors that will define an individual’s interest rate, unique credit score, the loan amount, down payment percentage, and the term of the loan.
A Real-World Example
For example, using a PMI (Private Mortgage Insurance) rate of around 0.7% with a 720 credit score, if you buy a mortgage for $350,000 while making only a 5% ($17,500) down payment; your mortgage will be $332,500. The monthly PMI cost will be approximately $194.
| Calculation | Amounts |
|---|---|
| Loan Amount | $332,500 |
| PMI Rate (Estimate) | 0.70% per year |
| Annual PMI Cost | $2,327.50 |
| Monthly PMI added to payment | ~194/month |
| Years until 20% equity (Avg. appreciation) | Approx. 7–9 years |
| Total PMI Paid (estimated) | $16,000–$20,000+ |
FHA MIP Specific Costs (2026)
| Loan Term | LTV at Origination | Annual MIP Rate |
|---|---|---|
| 30 years | $\le$ 90% (10%+ down) | 0.50% |
| 30 years | 90.01%–95% | 0.50% |
| 30 years | > 95% | 0.55% |
| 15 years | $\le$ 90% | 0.15% |
| 15 years | > 90% | 0.40% |
| All terms | Upfront MIP | 1.75% of base loan |
Disclaimer: Rates shown reflect current FHA premiums and may change if HUD revises mortgage insurance pricing.
FHA policy on MIP duration:
If your original down payment was less than 10% (original LTV greater than 90%), annual MIP generally remains for the life of the loan. Reaching 20% equity later does not automatically remove MIP.
Key Private Mortgage Insurance (PMI) Benchmarks for 2026
Unlike FHA loans, conventional PMI costs change due to fluctuations in the housing market. These fluctuations are mainly impacted by higher property values, available housing supply, and other macroeconomic forces.
30% (Most buyers must have private mortgage insurance because they have less than a 20% down payment when purchasing a house)
Of all conventional home purchases involve PMI
- Context: 30% of all conventional home purchases use private mortgage insurance (PMI). With housing costs continuing to rise into 2026 and the inventory of homes available for purchase being at very low levels, a higher percentage of buyers are using low down payment (3% to 5% down) conventional loans. This results in an increase in the percentage of conventional loans using PMI from 28% to 30%.
$210
Avg. monthly PMI on a $350K loan with 5% down and good credit
- Context: The average monthly PMI on a $350K loan with 5% down and good credit will be approximately $210. While the baseline risk tiers of PMI remain stable, private mortgage insurance companies (MGIC, Radian, and Essent) are making small changes to their pricing models based on the buyer’s credit score. As a result, a buyer with good credit can expect to pay for PMI somewhere just over $200.
6 to 6.5 Years
Avg. time buyers pay PMI before reaching 20% equity
- Context: Buyers now typically pay PMI for an average of 6 to 6.5 years before they reach a 20% equity position in their home. Because of steady but modest annual equity gains, along with the normal amortization of principal, buyers can expect to eliminate their conventional PMI in less time.
Disclaimer: The amount paid and duration vary based on the loan size, credit profile, home appreciation, and repayment schedule.
How Does Mortgage Insurance Work? (Step by Step)
The majority of clients who’ve paid PMI each month do so without any relationship with it other than seeing it listed as a separate line item on their mortgage statement. But, as you will soon find out, there is very much action occurring during that time when it comes to home mortgage insurance, as well as what will take place when a borrower defaults.
- Lender Arranges Coverage at Origination
At loan closing, the lender will obtain the mortgage insurance (PMI) from one of several larger PMI companies (such as MGIC, Radian, Enact, or Arch MI). Hence, you are not able to obtain the policy yourself, this will be done by your lender and they will also make all arrangements to pay for the PMI.
- You Pay Monthly Premiums (Usually)
Monthly PMI premiums are added (usually) to your monthly mortgage payment. The mortgage insurance premium may also be added to the mortgage rate or paid up front as a lump sum, as per the lender’s request.
- Coverage Protects the Lender — Not You
Although the majority of us pay for PMI, it is to protect the lender and it does not provide any sort of protection for you if you were to default on your mortgage. If you were to default on your mortgage, the lender would file a claim with the PMI company and the PMI company would reimburse the lender the “value” of their loss over and above the “sale value” of the home. You (and your credit) will still suffer from having defaulted on your mortgage and there is no protection from PMI regarding foreclosure.
- Coverage Cancels Once Equity Reaches Threshold
If you have borrower-paid PMI on your conventional mortgage, you may request PMI cancellation when your loan reaches 80% of the home’s original value, subject to lender requirements. If you don’t request a cancellation, your lender has to cancel automatically when your loan balance hits 78%, as required by the Homeowners Protection Act (HPA) of 1998.
Every PMI calculation has a set of rules, disclosures, and regulatory obligations which makes it very difficult to keep PMI consistent across all lenders. As a result, many lenders utilize Custom Mortgage Development solutions to automate their PMI tracking, FHA MIP calculations, loan servicing, and regulatory compliance processes.
The Homeowners Protection Act (HPA) — Your Legal Right
The HPA requires the automatic cancellation of PMI on conventional loans based upon the original purchase price, once the loan reaches a 78% LTV ratio. You can make a request to the lender to cancel your PMI once your loan balance reaches an 80% LTV, using proof of positive payment history.
The proper technology infrastructure is an essential part of an effective lending operation. If you require assistance in automating PMI calculations, FHA MIP workflows, loan origination, or mortgage servicing processes for your lending business, we would love to speak with you. At Awesome Technologies Inc., we specialize in developing mortgage software solutions for lenders to help them streamline their operations, gain compliance, and create a better experience for borrowers. Find out why so many lenders select us to be their mortgage technology partner.
How to Remove Mortgage Insurance?
How to Remove Your Mortgage Insurance is one of the questions most commonly asked by borrowers and therefore is addressed here. Your ability to remove PMI depends on the type of loan that you have. There are several places to start looking for an automatic cancellation and then others where you will have to initiate the process.
For Conventional Loans (PMI)
Wait for Automatic Cancellation at 78% LTV
Your lender must cancel PMI under the Homeowners Protection Act when your loan balance drops naturally to 78% of the original price of the house through scheduled payments. This takes no action from you, but it may take several years depending on where you are in your repayment schedule.
Request Cancellation at 80% LTV
You can cancel PMI once you reach 80% LTV after making timely payments (no payment over 30 days late in the past year and no payment over 60 days late within the last 2 years). Write to your lender to cancel the PMI payment. The lender will likely require an appraisal at your expense ($300-$500) to verify the current value of the property.
Leverage Home Appreciation
There are many cases where a person is now at or below 80% LTV due to their home increasing in value a lot and/or not making that high of a down payment. An example would be contacting your lender to request a new appraisal ($300-$500) and submit that to your lender. Some lenders require you to own your house for at least 2 years before they can remove PMI based on appreciation.
Refinance the Loan
If interest rates have dropped and you already have 20% equity in your house, you’ll likely benefit from refinancing into a new conventional loan that does not have a PMI. Make sure to evaluate your numbers carefully, because refinancing can typically incur closing costs of $3,000-$7,000. So make sure your monthly savings from refinancing would exceed the upfront cost.
For FHA Loans (MIP)
The FHA rules regarding the removal of MIP (Mortgage Insurance Premium) remain mostly unchanged from what we had after the change to the rules on June 3, 2013. Below, you will find a simplified table of the MIP removal rules for 2026:
FHA MIP Duration Rules (2026)
| FHA Loan Scenario | How Long You Pay MIP? | How MIP is Removed? |
|---|---|---|
| FHA loan originated after June 3, 2013 with less than 10% down | Entire loan term | Refinance into a conventional loan or pay off the loan |
| FHA loan originated after June 3, 2013 with 10% or more down | 11 years | Automatically terminates after 11 years |
| FHA loan originated before June 3, 2013 | Minimum 5 years and until the loan reaches 78% LTV | Automatically terminates when both conditions are met |
Key Takeaway
If you put less than 10% down on an FHA loan, MIP does not automatically disappear when you reach 20% equity. It remains for the life of the loan unless you refinance into a conventional mortgage.
If you put 10% or more down, MIP automatically ends after 11 years, regardless of how much equity you have at that point.
Note: FHA MIP rules are based on the FHA case number assignment date. For most borrowers obtaining FHA loans today, the post–June 3, 2013 rules apply.
How to Avoid Mortgage Insurance Altogether?
If you don’t want to pay PMI, you do not have to! There are many ways to avoid PMI. However each option has a drawback or tradeoff associated with it.
Here are several options available to you if you want to avoid PMI altogether:
- Put at least 20% as your down payment (easiest)
- Get a piggyback loan (80-10-10 structure)
- Choose Lender-Paid Mortgage Insurance (LPMI)
- If you are a veteran check for any possible VA loans
- Certain Credit Unions have No PMI Conventional Loans with a Down Payment of 10-15%
- Some Doctor/Professional Loan programs will eliminate your PMI
Here are several tradeoffs associated with these methods of avoiding PMI:
- Putting 20% down means that you will not have enough cash or liquidity for other emergency expenses or investment opportunities.
- Piggyback loans mean that you have two monthly mortgage payments and pay a higher combined interest rate.
- LPMI imposes a higher stated interest for the entire life of the loan.
- VA Loans are only available to individuals who have served in the military.
- No PMI loans are not available to all borrowers and have strict requirements.
- Professional Loans may contain other restrictions on how you can use the loan to purchase your home.
The Piggyback Loan (80-10-10) Explained
A piggyback loan separates out a first mortgage (80% of the value of the home) from a smaller second mortgage (10% of the value of the home). You are also putting 10% down when using this type of financing. Because the primary loan amount does not exceed 80% of the value of the home, there is no requirement for private mortgage insurance (PMI).
Is Paying Mortgage Insurance Worth It?
The best way to find an answer to this question is to review your situation. For example: there may be times where it might benefit you (paying PMI) and then there may be times when it would not benefit you (not paying PMI).
When PMI Makes Sense
- Should your home value grow by 5% to 8% each year, waiting to accumulate a 20% down payment for 3 to 5 years could potentially cost you more.
- Additionally, using your investment account to earn a higher return by depositing 20% of the purchase price from the account would reduce your earnings by .5% to 1% from the monthly PMI expense.
- You want to take advantage of today’s low interest rates. Locking in a low interest rate today could outweigh the cost of several years of PMI payments.
When is PMI Not Worth It?
A credit score that falls below 700 will give you a PMI rate higher than 1.2%, which means the cost will become significant enough for alternatives to be less costly. If you are buying via an FHA loan, you can put down 10% or possibly 20% since FHA MIPs will be permanent for loans less than 10% down or 15% for 30-year loans.
The Bottom Line on Mortgage Insurance
Many people do not understand mortgage insurance, but for many people who buy homes, it is a useful way to transition to homeownership. Rather than waiting years to save a 20% down payment, buyers can get into the market earlier and start creating equity by applying for a mortgage with higher total mortgage insurance premiums.
The key to being successful with PMI or MIP is first knowing how they work, learning the costs associated with PMI or MIP, and developing plans to either eliminate PMI or MIP if possible. In order to use PMI or MIP to your benefit, you should compare mortgage loans, improve your credit profile and monitor your equity growth regularly over time.
If you are evaluating the various mortgage options available to you and would like to learn more about the costs of PMI and/or FHA MIP, please contact us for assistance. Awesome Tech Inc team specializes in mortgage software development solutions that help lenders streamline operations, improve compliance, and deliver a better borrower experience. Let’s connect!
Frequently Asked Questions
1. Does mortgage insurance protect me if I lose my job and can’t pay?
No. Mortgage insurance (PMI) only provides protection for the lender in the event of missed payment on your mortgage. If you become unemployed and cannot complete your mortgage payment obligations, PMI will not be able to pay on your behalf.
2. Is PMI tax-deductible in 2025 and 2026?
Over the years, the PMI tax deduction has changed many times based upon changes to the federal tax code. To date, the PMI premium tax deduction has NEVER been extended permanently under applicable laws. Please contact your accountant or visit the IRS website for the most current information regarding this.
3. What happens to PMI if I refinance my home?
Refinancing creates a new loan, so your old PMI is cancelled. If your new loan is below 80% LTV based on current appraisal value, no PMI is required on the new loan.
4. How long does PMI last on average?
The average borrower with a conventional loan who monitors their equity and then requests PmI cancellation will have PMI for approximately 5-7 years. If you do not request cancellation, but wait for PI to be automatically removed at 78% LTV, then your average time will increase to 9-11 years under conventional 30 year standard amortization terms.
5. Does a higher credit score mean lower PMI?
Very much so. Based on a loan amount of $300,000, this is equal to an approximate $50/month for PMI at the higher FICO score, and $375/month at the lower FICO score. If you are very close to jumping into another credit score tier, it may be beneficial to wait for the 6-12 months.
6. Is MIP the same as PMI on FHA loans?
MIPs are specifically for FHA loans and are issued by the federal government through HUD. They are charged based on a fixed rate and have a separate cancellation policy and structure. In comparison, PMIs are only associated with conventional loan types and the provisions are issued by private mortgage insurance companies only.
7. Can I negotiate mortgage insurance rates?
You do not have to be able to choose the MI provider for your loan type. When comparing lenders for conventional loans, they each will use different MI providers; therefore, you will not have the freedom to shop multiple MI providers with larger financial institutions selling the same conventional loan type. In the case of FHA loans, the MI rates are established by HUD and are the same for all lenders offering FHA loans.
