What Is Mortgage Insurance?

Mortgage insurance protects your lender from financial losses if you default on your mortgage. You’re usually required to pay for mortgage insurance if you make less than a 20% down payment on a conventional loan, or if you choose a government-backed home loan program.

Understanding how mortgage insurance works can help you avoid or reduce the cost.

Key takeaways about mortgage insurance

• You can avoid paying for mortgage insurance on a conventional loan by making at least a 20% down payment, or by taking out a piggyback loan.
• You can’t avoid paying for mortgage insurance on FHA loans, since it’s required in all cases.
• You won’t have mortgage insurance costs when taking out a VA or USDA loan, but will have guarantee fees.
• In some cases, you can reduce the cost of mortgage insurance by improving your credit score or financial profile.

What is mortgage insurance and how does it work?

Mortgage insurance will pay your lender a certain amount of money if you’re unable to repay your mortgage loan. This reduces financial risk for lenders, which allows them to offer mortgages with more relaxed requirements.

→ Mortgage insurance is typically required on a conventional loan if you make less than a 20% down payment. This type of plan is called private mortgage insurance (PMI). The “private” means that the insurance is provided by private companies, and is not insured by the government. You’ll typically pay for it monthly, as a part of your regular mortgage payments.

→ Mortgage insurance is also required for FHA loans, which are backed by the Federal Housing Administration, regardless of your down payment amount. You’ll pay for two types of FHA mortgage insurance:

• An upfront mortgage insurance premium (UFMIP), which is charged as a lump sum and typically financed into your loan balance.
• An annual mortgage insurance premium (MIP), which is charged yearly, divided by 12 and added to your monthly payments.

How much does mortgage insurance cost?

For conventional loans you’ll pay an average of $30 to $70 per month for every $100,000 you borrow in PMI premiums. For a median-priced home in today’s market, that comes to around $122 to $285 per month.

For FHA loans the charge for upfront FHA mortgage insurance is generally 1.75% of your loan amount. The annual MIP ranges between 0.15% and 0.75% of your loan amount. The premium is divided by 12 and added to your monthly payment. At today’s median home price, that could mean paying around $7,136 upfront and $51 to $255 in monthly premiums.

  Get a quick estimate of PMI premiums by using LendingTree’s mortgage calculator. Just be sure to check the “include PMI” box under “advanced options.”

What factors determine how much you pay for mortgage insurance?

How do I pay for mortgage insurance?

Payment options for conventional loans

1. Pay it monthly. Borrower paid mortgage insurance (BPMI) is the most popular option, because you can divide up the cost and add it to your monthly payments. You can do this through an escrow account or finance the cost by rolling it into your mortgage.
2. Pay it upfront. You can pay your entire premium in a lump sum when you take out your loan, which allows you to avoid paying it monthly. In cases where a seller offers to pay a percentage of your closing costs, you can use the credit to pay the single premium insurance.
3. Split it. PMI companies may offer “mix-and-match” choices that allow you to pay part of the PMI premium in a lump sum at closing and pay the other portion monthly.
4. Let the lender pay it. Your lender may offer to pay mortgage insurance on your behalf, if you’re willing to accept a higher mortgage rate for the life of the loan.

Payment options for FHA loans

There are two ways to pay for the upfront portion of your FHA mortgage insurance:

1. Finance it into your loan amount. This is the most common way to pay the upfront FHA mortgage insurance fee.
2. Pay it in cash. You can either pay it from your own funds, get a gift for the cost or ask the seller to pay for it.

However, annual FHA mortgage insurance must be paid as part of your monthly mortgage payments.

PMI vs. MIP: Which is best for you?

Although PMI and MIP essentially do the same thing — reimburse the lender for financial losses if they have to foreclose on your home — different factors determine how much each one will cost. Depending on your financial profile, you could see significant savings by going with one or the other.

Click through the expandable sections below to see more detail on how each factor in your financial profile can affect your mortgage insurance premiums.

Example: PMI vs. MIP savings

Let’s imagine a borrower with a credit score under 740 who wants to put 3.5% down on a $300,000 home. That borrower will have a slightly lower monthly payment if they go with an FHA loan instead of a conventional loan. But, if that same borrower can get their credit score above 760, they’ll save money by going with a conventional loan instead.

Note: For each credit score range listed below, the cheaper monthly payment is in green, while the more expensive option is in red.

Source: Urban Institute’s Housing Finance Policy Center.

As the table shows, the lower a borrower’s credit score, the more they stand to save with an FHA loan — but only for borrowers with scores under 740.

Mortgage insurance premiums vs. guarantee fees

There is no mortgage insurance for VA loans backed by the U.S. Department of Veterans Affairs or USDA loans guaranteed by the U.S. Department of Agriculture — and, despite that fact, you may still be eligible for a no-down-payment mortgage. But there’s a catch: These government-backed programs require guarantee fees instead.

A guarantee is a promise to pay the lender a specific amount if you default on a VA or USDA loan. And, just like with mortgage insurance, you’re required to pay a premium that makes protecting the lenders possible. In the case of VA and USDA loans, the guarantee fees also protect taxpayers from losses in the event of mortgage default.

How much do guarantee fees cost?

Source: VA.gov, USDA.gov

VA funding fee

Most VA borrowers must pay a funding fee that ranges from 0.50% to 3.30% of their loan amount and is charged to offset the taxpayer burden related to VA loans.

How it’s paid

The fee is typically financed into the loan amount, but can be paid in cash from your funds or by the home seller.

USDA guarantee fee

USDA loans require two types of guarantee fees:

1. A lump-sum upfront guarantee fee based on a percentage of your loan amount, which is usually rolled into your loan amount.
2. An annual guarantee fee that’s divided by 12 and added to your monthly mortgage payment.

How to avoid mortgage insurance

Private mortgage insurance

• Make at least a 20% down payment. You can get a conventional mortgage without PMI by putting down 20% or more.
• Take out a piggyback loan. Rather than paying for mortgage insurance, you can take out a home equity loan or home equity line of credit (HELOC) and use the funds to push your down payment above 20%. You’ll need enough cash to cover a 10% down payment, the home equity loan or HELOC will cover another 10% and you’ll finance the remaining 80%. This strategy is called using a piggyback loan.

FHA mortgage insurance

• The only way to avoid FHA MIP and UFMIP is to choose a different loan program. It’s possible to stop paying FHA mortgage insurance premiums after 11 years, but only if you made at least a 10% down payment at closing.

VA funding fee

• Apply for a VA disability waiver. Military veterans with a service-related disability may be eligible for a funding fee exemption. Find out if you’re exempt by obtaining your VA certificate of eligibility.

USDA guarantee fee

• The only way to avoid USDA guarantee fees is to choose a different loan program — there’s no way to reduce the fee cost.

How to save on mortgage insurance

Conventional PMI

• Boost your credit scores. Your credit score plays a big role in your PMI costs; keeping low credit card balances and paying bills on time could mean big savings.
• Keep your DTI ratio low. A DTI ratio higher than 45% usually comes with a higher PMI premium.
• Ask the seller to pay a lump-sum PMI premium. Consider using a seller concession to make a lump-sum PMI payment. You might end up needing cash for the other costs, but you’d have a lower monthly mortgage payment.
• Avoid lender-paid mortgage insurance. Taking a higher interest rate so your lender pays your mortgage insurance upfront may keep your out-of-pocket costs low at the closing table. However, you’re stuck with the higher rate for the life of the loan.
• Check your home equity regularly. You can ask to cancel PMI once you’ve reached 20% equity. You might have to pay for a home appraisal, but it’s worth it if home prices are booming in your neighborhood.

FHA mortgage insurance

• Make at least a 6% down payment. The annual MIP is slightly lower when you make at least a 6% down payment.
• Choose a shorter loan term. If you can afford the payments of a 15-year mortgage term, you can reduce your monthly MIP premium by quite a bit.
• Refinance to a conventional loan as soon as you can. If you chose an FHA loan because your credit scores were low, refinance your FHA loan to a conventional mortgage as soon as your credit is in better shape.
• Ask the seller to pay the UFMIP. The FHA permits sellers to pay up to 6% of your sales price to cover FHA closing costs, including your UFMIP.
• Do an FHA streamline refinance. If you currently have an FHA loan, the FHA streamline refinance allows you to refi with reduced MIP costs.

VA funding fees

• Make a bigger down payment. A 5% to 10% down payment may save you thousands of dollars on the funding fee.
• Ask the seller to pay the funding fee. VA guidelines allow sellers to pay up to 4% of the sales price toward the buyer’s VA closing costs.
• Save your VA benefits for your dream home. In most cases the VA funding fee is 2.15% of your loan amount the first time you use it, compared to 3.30% for every use thereafter. On a $350,000 home, that could mean savings of around $4,025 for a first-time user.