Key Takeaways
- Mortgage premium insurance helps make homeownership possible with less than 20 percent down
- Conventional loans use PMI, while government-backed loans have separate insurance rules
- Monthly PMI costs vary based on credit, loan amount, and down payment size
- You can request to cancel PMI at 80 percent equity or wait for it to drop off at 78 percent
- Refinancing may help you remove PMI and secure a better interest rate
- Homeowners insurance and mortgage insurance serve two very different purposes
- Always talk to your lender about your options and how to plan ahead
What Is Mortgage Insurance and How Does It Work?
Mortgage insurance is a common part of many home loans, especially for buyers who cannot afford a large down payment. While some view it as just an added cost, mortgage insurance actually plays a key role in making homeownership more accessible. It protects lenders in case of default while giving more people the opportunity to qualify for a loan.
This guide will walk you through everything you need to know, from the different types of mortgage insurance to how it affects your loan and how you can eventually cancel it.
Understanding Mortgage Insurance and Its Purpose
What Is Mortgage Insurance and Why Does It Matter?
Mortgage insurance is designed to protect lenders if a borrower defaults on a loan. It’s often required when a buyer puts down less than 20 percent on a conventional loan. This insurance makes lenders more willing to approve loans with lower down payments.
When Do You Need Mortgage Insurance?
You typically need mortgage insurance when your loan-to-value ratio (LTV) is above 80 percent. This means you borrowed more than 80 percent of the home’s value. It’s most common with first-time homebuyers or buyers using FHA loans.
Who Benefits From Mortgage Insurance?
While it protects the lender, mortgage insurance also benefits buyers. It allows them to purchase a home sooner, rather than waiting to save a full 20 percent down payment.
Types of Mortgage Insurance
Private Mortgage Insurance (PMI)
PMI is used with conventional loans. It can be paid monthly, upfront at closing, or a mix of both. The cost depends on your loan size, credit score, and down payment amount.
Government-Backed Mortgage Insurance
FHA, USDA, and VA loans come with their own forms of mortgage insurance or guarantees. For example, FHA loans require mortgage insurance premiums (MIP) throughout most of the loan’s life unless certain conditions are met.
Borrower-Paid vs. Lender-Paid
With borrower-paid mortgage insurance, the borrower pays monthly or upfront. With lender-paid, the lender covers the cost but typically charges a higher interest rate in return. You may find helpful resources in our mortgage loan types.
How Mortgage Insurance Affects Loan Costs
Monthly Payment Impact
Mortgage insurance increases your monthly housing expense. For PMI, expect to pay between 0.3% to 1.5% of your loan amount annually, divided into monthly payments.
Upfront Costs
Some loans require a one-time upfront mortgage insurance premium. FHA loans, for example, have both upfront and annual premiums.
Budgeting for Mortgage Insurance
It’s important to factor these costs into your monthly budget and long-term loan planning. Ask your lender for a full cost breakdown before signing.
Are There Tax Benefits?
Mortgage insurance premiums were tax-deductible in the past, but this changes from year to year. Check with a tax professional to see if you’re eligible for down payment assistance.
How to Get Mortgage Insurance
Applying for Mortgage Insurance
Your lender usually arranges mortgage insurance as part of the loan approval process. You don’t need to apply separately.
Documents and Eligibility
Lenders assess your income, credit score, and down payment when deciding your insurance terms. Good credit and a larger down payment may reduce the cost.
How Long Does It Take?
Mortgage insurance is finalized during the loan approval process and doesn’t require much additional time—assuming all documents are in order.
How to Cancel Mortgage Insurance
When Can You Cancel?
Once your loan balance drops to 78% of the home’s original value (or you reach 20% equity), you may be able to cancel PMI on conventional loans.
Automatic vs. Requested Cancellation
PMI is automatically canceled at 78% LTV but can be requested at 80% if you’ve been making timely payments. Lenders may require a new appraisal to confirm home value.
Tracking Equity Growth
Paying extra toward your principal or benefiting from rising home values can help you reach the equity needed to cancel PMI sooner.
Refinancing to Eliminate PMI
If your home has gained value, refinancingmight lower your LTV below 80%, allowing you to remove PMI and possibly get better loan terms.
Talking to Your Lender
Your lender can guide you through the process of canceling PMI. Ask what documents are required and when you can qualify.
Common Misunderstandings About Mortgage Insurance
It’s Not Homeowners Insurance
Mortgage insurance protects the lender, while homeowners insuranceprotects your property. They are two very different products.
You Don’t Pay Forever
Most conventional loan borrowers can cancel PMI eventually. Only some government-backed loans (like FHA) have lifetime insurance.
It Doesn’t Hurt Loan Approval
In fact, mortgage insurance makes loan approval more likely because it reduces risk for the lender.
It’s Not Wasted Money
Even though it benefits the lender, PMI helps you buy a home sooner and build equity over time—often saving money compared to renting longer.
Ready to Take the Next Step?
Mortgage insurance can feel like an extra burden, but it is often the key to buying your home sooner. If you’re not sure which type of insurance applies to your situation or how to manage the added cost, we can help. Our team works with homebuyers across the state to make smart, affordable financing decisions that support long-term financial goals.
Contact us todayto discuss your mortgage options and learn how to reduce or remove mortgage insurance from your home loan. Let’s build a plan that works for you.
Adriana Bates works with her clients during the loan process as a confidant, educator, and adviser. Adriana not only identifies their financial situation but also strives to understand her client’s priorities during this process.
She believes in the value of making educated decisions and wants to provide her clients with enough knowledge so they are empowered to do so. Adriana also serves to advise them throughout the process on what to expect from Clear Mortgage LLC LLC, and what their role entails, in order to make the process as smooth as possible.
Adriana is involved in the initial education/consultation, discussing her client’s options, talking with them during the process, and then ensuring everyone gets to the closing table.
