What Is Mortgage Insurance? How It Protects Your Lender and Can Help You

When you buy a home with a down payment of less than 20%, your small down payment increases the risk for your mortgage lender. If you default on the loan, the lender may not be able to sell the home for enough to repay your full loan balance. To mitigate this risk, lenders may require you to buy mortgage insurance. 

Mortgage insurance increases the total cost of your loan. However, it can open the door to buying a home earlier than you could otherwise afford. And you can sometimes remove it once you have enough equity in your home. 

Read on to learn how mortgage insurance works with different types of home loans to decide if paying for it is right for you.

What is mortgage insurance?

Mortgage insurance protects your lender if you don't make payments on your mortgage, making it less risky for lenders to provide home loans to borrowers with a small down payment. 

A home acts as collateral for a mortgage loan, but there are fees and costs associated with selling a home, and sometimes property values decline after you buy. If you make a low down payment and stop paying on your loan, the lender can foreclose on the house. However, the home may not sell for enough to pay back the full loan balance. Mortgage insurance typically covers a portion of the lender’s loss if the foreclosure proceeds don’t repay the full balance. 

Mortgage insurance can make homeownership more accessible by allowing you to afford a home with less money down, but it also increases your costs. Depending on the type of loan and which option you choose, mortgage insurance premiums may be:

• Added to your monthly payment 
• Charged upfront as a lump sum
• Both
• Paid by the lender and factored into your mortgage interest rate

When is mortgage insurance required?

Lenders typically require private mortgage insurance on conventional loans if you make a down payment of less than 20%. 

Most government-backed home loan programs also require some form of mortgage insurance, including FHA loans and USDA loans. In fact, these types of mortgages require mortgage insurance no matter your down payment. 

VA loans do not require mortgage insurance, but require a one-time funding fee that serves a similar purpose.

Types of mortgage insurance

The table below shows the mortgage insurance requirements for different types of mortgage loans. The best option for you will depend on your financial situation.

Private mortgage insurance

When you take out a conventional mortgage with a down payment of less than 20%, your lender requires you to pay for private mortgage insurance (PMI) provided by a private insurer. This protects the lender from financial loss if you fall behind on payments, but it doesn’t protect you from foreclosure. 

While PMI adds to your monthly housing cost, premiums may be cheaper than FHA mortgage insurance if you have good credit and a sizable down payment. Most borrowers pay PMI monthly, but paying upfront may be an option in some cases. You can also ask your lender to cancel PMI payments once you have enough equity. 

FHA mortgage insurance

All FHA loans through the Federal Housing Administration require mortgage insurance. You pay premiums as part of your monthly payment, which are remitted to the FHA. 

You must pay an upfront mortgage insurance premium, which you can either pay at closing or roll into the loan. You must also pay an annual premium as part of your monthly payment.

The annual rate depends on the loan amount, repayment term, and your down payment. For example, you’ll pay a lower premium if you choose a 15-year term and put at least 10% down. A down payment of 10% or more also allows you to stop paying mortgage insurance after 11 years. Otherwise, you must continue payments for the life of the loan. 

Borrowers “need to go in understanding the lifetime MIP commitment if they're putting less than 10% down,” says Kristy Nakamura, VA loan specialist and licensed Oahu real estate broker. “I make sure every FHA buyer I work with has a plan to refinance into conventional once they hit 20% equity.”

Insurance for USDA loans

Home loans backed by the U.S. Department of Agriculture (USDA) always require guarantee fees. These are similar to FHA mortgage insurance premiums, but are less expensive. 

For 2026, the upfront guarantee fee is 1% of the loan amount, which you may opt to roll into the loan. The annual fee is 0.35%, which you can pay with your monthly mortgage payments. 

Insurance for VA loans

VA loans through the Department of Veterans Affairs are available to eligible servicemembers, veterans, and eligible surviving spouses. These loans don’t require monthly mortgage insurance premiums. “This is one of the single biggest financial advantages of the VA benefit, and it's consistently undervalued,” says Nakamura. 

Instead of buying mortgage insurance, you pay a one-time funding fee that ranges from 1.25% to 3.3% for purchase and construction loans. The fee depends on the amount of the loan, your down payment amount, and whether it’s your first VA home loan. 

You can choose to pay the funding fee with your closing costs or roll it into your loan payments. If you choose the latter option, you’ll pay interest on the fee. This means it’ll cost you more over time.

That said, the practical reality is most buyers need every dollar of their cash for the down payment, closing costs, and reserves,” says Nakamura. “I usually tell clients, if you have the cash and it won't deplete your emergency fund, pay it up front. If it's a stretch, roll it in and don't lose sleep over it.”

4 ways to avoid mortgage insurance

Making a 20% down payment is probably the best-known way to avoid mortgage insurance, but it’s not the only option.

1. Make a 20% down payment on a conventional loan

Lenders don’t require PMI if you put at least 20% down. While you can keep saving for a large down payment, you should pay attention to home price trends in your area. “In most markets, waiting to save a larger down payment costs buyers more than the mortgage insurance would have,” says Nakamura. However, it makes sense to wait if local home prices are flat or declining. 

2. Get a piggyback mortgage

“A strategy home buyers can use to avoid mortgage insurance is to get a piggyback second mortgage,” says Doug Perry, Strategic Financing Advisor at HouseCashin. “The piggyback second makes up the difference between the borrower's down payment and the 80% first mortgage, allowing a low down payment loan without MI.” Consider the interest rate on the piggyback loan and calculate whether you’ll save compared to mortgage insurance. 

3. Opt for lender-paid mortgage insurance 

“Another option is a lender-paid mortgage insurance (LPMI) structure, where the lender covers the PMI in exchange for a slightly higher interest rate,” explains Nakamura. “The trade-off is you can't remove it later since it's baked into the rate, but it lowers your monthly payment compared to borrower-paid PMI.”

4. Use a down payment assistance programs

Many state and local governments offer down payment assistance for first-time home buyers or underserved groups. These may be grants or second loans that help you make a larger down payment to avoid mortgage insurance. For example, the Colorado Housing and Finance Authority offers a down payment assistance grant up to the lesser of $25,000 or 3% of your first mortgage, which you don’t need to repay. 

How to remove mortgage insurance

You can’t stop paying guarantee fees on USDA loans or cancel a VA funding fee that you rolled into your mortgage payments. But you may be able to remove private mortgage insurance on a conventional loan or cancel FHA mortgage insurance if you meet certain requirements. 

Conventional loans

For conventional loans, you must be current on your mortgage payments to cancel PMI. 

Under the Homeowners Protection Act, your lender will automatically cancel your PMI payments midway through your loan term or once your principal loan balance reaches 78% of your property’s original value, whichever comes first. 

You can also request that your lender remove PMI when your principal balance equals 80% of the original value of your home. Your home’s original value is the lesser of the sale price or the appraised value at the time you bought it. 

Most U.S. home loans are backed by Fannie Mae or Freddie Mac, which set their own rules that make it easier for borrowers to remove PMI. For example, Fannie Mae guidelines may allow you to request cancellation of PMI based on your home's current value after a minimum period (typically 2 to 5 years, subject to appraisal and payment history requirements). That may allow you to take advantage of price appreciation to potentially remove PMI sooner. 

FHA loans

If you have an FHA mortgage, your eligibility for mortgage insurance removal depends on when you took out the loan. 

For FHA loans closed between January 2001 and June 3, 2013:

• For FHA loans with terms longer than 15 years, HUD automatically cancels MIP after you’ve made payments for at least five years and your principal balance reaches 78% of your home’s original value. 
• For FHA loans with terms of 15 years or less, HUD automatically cancels MIP once your principal balance reaches 78% of your home’s original value.

For FHA loans with case numbers assigned after June 3, 2013:

• If you made a down payment of at least 10%, HUD automatically cancels MIP after 11 years.
• If you made a down payment of less than 10% on an FHA loan, you’ll need to pay MIP for the life of the loan unless you refinance to a conventional loan. If you refinance when you have at least 20% equity in your home, you’ll avoid PMI as well.