What is Mortgage Insurance? Costs, Rules, & FAQ’s

Mortgage insurance protects lenders in case a borrower can’t pay their mortgage. If you end up not being able to pay your mortgage (or “defaulting”), your mortgage insurance payments will soften the loss for the lender financing your loan. In a sense, mortgage insurance benefits homebuyers because the minimum down payment requirements for getting a mortgage may be a lot higher without it.

When is mortgage insurance required?

On a conventional loan, mortgage insurance is required when you have less than 20% equity in your home. If your purchase price is $200,000, you’ll pay mortgage insurance until your outstanding loan balance reaches approximately $160,000.

Government-backed programs have their own conditions as to when mortgage insurance will drop off from your monthly payments. Those answers depend on when you applied for the loan, your original down payment amount, and the specific loan program you’re using.

How much does mortgage insurance cost?

The cost of mortgage insurance depends on your loan program, down payment amount, and credit score, among other factors. Here are some estimated cost ranges for mortgage insurance on a $200,000 home with 5% down and a 720+ credit score.

These numbers are just estimates - figures may change.

• PMI (conventional mortgages): $90-150/month. You’ll probably pay monthly private mortgage insurance if your down payment is below the 20% mark.

» READ MORE: What are the benefits on a conventional loan?

• MIP (FHA mortgages): $3,325 upfront premium (1.75% of loan amount), and $75-150/month. MIP stands for "monthly insurance premium." If you don’t have the cash available to pay the upfront premium at closing, you have the option of rolling it into your loan amount. The ongoing monthly MIP will vary depending on your loan-to-value ratio and mortgage term.

» READ MORE: What are the benefits of an FHA loan?

• USDA mortgage insurance: $2,000 upfront, and $55/month. Like the FHA’s MIP, the USDA’s upfront mortgage insurance can be rolled into the loan amount. The monthly payment will adjust based on your outstanding loan balance. So if you continue to make regular payments, the monthly mortgage insurance will decrease year-after-year.

» READ MORE: What are the benefits of a USDA loan?

• VA loans don’t require mortgage insurance. But some borrowers will pay a VA funding fee.

» READ MORE: What are the benefits of a VA loan?

» READ MORE: Learn about VA funding fees

Get started on your pre-approval for a home loan now!

Can mortgage insurance be cancelled or avoided?

Mortgage insurance can definitely be avoided. If you put down 20% or more on a conventional loan, you won’t pay any mortgage insurance. If you put down less than that on a conventional loan, the mortgage insurance will drop off once you hit the 20% equity mark. Getting rid of mortgage insurance could take several years, depending on your down payment amount.

Can you avoid mortgage insurance on FHA & USDA loans?

FHA mortgage insurance guidelines are more complex than a conventional. The costs will depend on when you applied, the length of your loan term, and your down payment amount. You can’t avoid FHA mortgage insurance altogether. Likewise, USDA loans don’t offer any means to avoid mortgage insurance.

But there’s good news: in certain cases, you do have the ability to stop paying mortgage insurance when you refinance a loan. Refinancing a loan replaces the original with a new one. There aren’t any prepayment penalties on an FHA loan, so you’re able to refinance when you’re ready.

» READ MORE: Save thousands by refinancing your mortgage

What is lender-paid mortgage insurance?

Lender-paid mortgage insurance (LPMI) allows borrowers to avoid paying mortgage insurance on a conventional loan even if their down payment is less than 20%. In exchange for the lender paying mortgage insurance on their behalf, the borrower’s interest rate is increased. Some buyers may benefit from LPMI when they plan to pay their mortgage for a shorter amount of time.

Not all lenders offer LPMI. But there may be other options available, such as paying mortgage insurance as a single premium or split premium at closing. Your mortgage adviser will help you determine what’s best for your budget.

Mortgage Insurance vs. Home Insurance

Mortgage insurance protects your lender in case of default, while home insurance protects you in case of disaster. Your lender will likely require you to get a homeowner’s insurance policy. It’ll protect you against financial loss due to inclement weather like lightning and hail, as well as catastrophic events like explosions and fires.

Homeowner’s insurance is different from a home warranty. A home warranty will cover repairs and replacements of important home systems like HVAC, electrical, plumbing, and certain kitchen appliances.

See what your monthly payments would be

See what your monthly mortgage breakdown will look like. The most accurate way is to get a personalized quote from an experienced lender. Let’s find out what your best options are. Get started with the mortgage lender Texans trust!