What Is Mortgage Insurance? 2025 Guide

If you don’t have enough to make a 20% down payment on a home, private mortgage insurance (PMI) could help bridge the gap. This type of insurance helps buyers purchase a home with a smaller down payment by giving lenders added reassurance that the loan will be repaid — even if the borrower defaults. However, this protection for lenders comes with additional costs for homeowners.

Learn more about how mortgage insurance works, what it can cost, and how to avoid it, can help you make smarter decisions about your home purchase.

What is mortgage insurance?

Private mortgage insurance (PMI) is an added expense you’ll need to consider when you take out a mortgage with less than 20% down. The insurance protects your lender against the risk that you might default on your loan. 

Depending on the type of mortgage you get, you could pay mortgage insurance for as long as you own the house. You may be able to get rid of it once you acquire 20% equity in your home.

Paying extra might seem annoying, but look at it this way: By paying mortgage insurance, you can buy a home you might not otherwise be able to afford with a traditional down payment.

“We love mortgage insurance,” said Kelly Cort, a California-based senior loan officer at Guild Mortgage. “It helps people get into properties before they have the ability to save 20%.” 

By paying PMI, homebuyers can immediately begin building equity instead of saving and waiting while continuing to rent. In most cases, the opportunity for appreciation is much higher than the cost of PMI, she said.

How mortgage insurance works

Mortgage insurance is often calculated as a percentage of the overall loan amount, such as 1.5%. Your loan disclosure agreement will determine how much you can expect to pay.

Usually, you’ll either pay a mortgage insurance premium monthly, upfront at closing, or both. It depends on what kind of mortgage insurance you have, and that depends on the type of mortgage. 

“You can minimize mortgage insurance by having a better credit score and also by having a larger down payment,” said Michael Espinosa, a Certified Financial Planner based in Salt Lake City. If your credit score isn’t great, then the type of mortgage you choose could determine whether the mortgage insurance is more affordable for you.

Types of mortgage insurance

There are several different types of mortgage insurance. They vary based on the type of loan, whether it’s government-backed, and who pays the premium. 

Private mortgage insurance

Private mortgage insurance (PMI) is for conventional loans, which are your basic, everyday mortgages. If your down payment is less than 20%, your lender will require you to pay PMI. 

You’ll usually pay PMI as a monthly premium alongside your mortgage principal and interest payment. The amount will depend on how much you put down and your credit score. Usually, it adds up to about 1% or 2% of the loan amount (but sometimes it can be as much as 6%).

In some cases, you can request to drop PMI when you’ve reached 20% in equity. That can lower your mortgage payment, saving you money each month. According to Reed Letson, owner of Elevation Mortgage, once you hit 22% equity (based on the original purchase price), PMI can be dropped automatically.

These are specific types of PMI:

• Borrower-paid mortgage insurance: When you pay the mortgage insurance as the borrower, it’s considered borrower-paid mortgage insurance (BPMI). Borrower-paid is the most common arrangement for mortgage insurance.
• Lender-paid mortgage insurance: If the lender arranges to pay the mortgage insurance, it’s called lender-paid mortgage insurance. As nice as that may sound, you should still run the numbers, as the tradeoff may be a higher mortgage rate. “Think of this as a lender credit, but instead of going towards closing costs, it goes toward the PMI buyout,” Letson said.

FHA mortgage insurance

If you choose a loan backed by the Federal Housing Administration (FHA), you’ll be required to pay mortgage insurance premiums (MIP). 

Mortgage insurance for FHA loans typically includes an upfront premium of 1.75% and an ongoing monthly premium. Although you may be able to roll the upfront cost into the loan.

The cost of the annual premium varies depending on the loan amount, term length, and down payment, but is generally 0.55% for 30-year loans with 3.5% down.

You’ll need to keep paying your MIP for as long as you have the loan, unless you put down more than 10%. In that case, you’ll keep paying mortgage insurance for the first 11 years of the loan. Otherwise, you'll need to refinance if you want to get rid of mortgage insurance.

Insurance for USDA loans

Loans backed by the U.S. Department of Agriculture (USDA) also require insurance payments, although they aren’t called mortgage insurance. 

USDA borrowers pay a 1% upfront fee and an annual guarantee fee of 0.35% of the loan amount (divided into monthly installments).

Insurance for VA loans

Veterans and service members who choose a VA loan don’t pay mortgage insurance. Instead, the Department of Veterans Affairs (VA) requires an upfront funding fee, which is determined by the amount of your down payment, ranging from 1.25% to 3.3%. 

For first-time VA loan borrowers, the fee can be up to 2.5%. Second-time VA loan borrowers pay up to 3.3% of the loan amount. Though some disabled veterans may be exempt from paying it.

Is mortgage insurance tax deductible?

According to U.S. Mortgage Insurers, around 3.4 million homeowners a year benefited from mortgage insurance payment tax deductions between 2007 and 2021, when the option expired. The average savings per qualified filer was $1,454.

In 2025, President Trump signed the One Big Beautiful Bill into law, which permanently reinstated the mortgage insurance tax deduction for eligible homeowners, beginning with tax year 2026 (filed in 2027). The tax deduction is treated like deductible mortgage interest.

Who qualifies for the mortgage insurance tax deduction?

To qualify for the full mortgage insurance premium deduction, your annual gross income (AGI) must be $100,000 or less if you’re married and file jointly ($50,000 or less for single filers). If you're a homeowner who itemizes your tax return, you can deduct mortgage insurance premiums on up to $750,000 of mortgage debt (or $375,000 if you're married and filing separately). Note that if your AGI is over $110,000, you’re not eligible to deduct PMI premiums.

How to avoid or cancel mortgage insurance

There are several ways to get rid of mortgage insurance. Here are the most common: 

• Put 20% down: With at least 20% on a conventional mortgage, you won’t have to pay mortgage insurance.
• Choose a single premium PMI: This allows you to make a single payment to remove the PMI from a conventional mortgage, according to Letson. 
• Go for lender-paid PMI: You won’t need to pay out of pocket, as the lender will cover the PMI for you, but you’ll usually pay a higher interest rate.
• Request it: Once your mortgage balance is 80% of the value of your home, you can request that the mortgage servicer remove the PMI.
• Wait for it to happen automatically: PMI will be automatically dropped when you reach 22% equity in your home (based on the original purchase price).
• Refinance: Once you have 20% equity in your home (based on current value), refinance into a loan without mortgage insurance.