What is Mortgage Insurance? Everything You Need to Know

If you're like most people, your greatest concern when getting ready to buy a home isn't the monthly mortgage payment. It's having enough saved for a down payment.

Many homebuyers assume you need to have a down payment equal to 20% of the home's value. That's not the case. Yes, there are benefits to putting down that large amount upfront, but if you can't afford that, you may still qualify for a home mortgage thanks to something called mortgage insurance.

What is mortgage insurance?

Mortgage insurance offers the lender an extra layer of protection when you buy a home. If you take out a home loan with a down payment under 20%, mortgage insurance is usually a must.

When you put at least 20% down on a home, it's usually a sizeable enough investment to give the lender some confidence that you won't default on the loan. A smaller down payment, however, means the lender is taking on more risk. To offset that risk, they can require mortgage insurance, which protects them from loss in case you can't keep up with your payments.

Mortgage insurance is a requirement on federally insured home loans, such as Federal Housing Administration or U.S. Department of Agriculture loans. On a conventional mortgage, mortgage insurance may be called private mortgage insurance or PMI.

Types of mortgage insurance

A few types of mortgage insurance exist. Here are some of the most common:

Borrower-paid mortgage insurance (BPMI)

You'll pay your premium monthly as part of your mortgage payment. Once you have 22% equity in your home, meaning your loan's principal balance is 78% of the home's value, your lender will typically perform an automatic review to determine if the BPMI policy can be canceled. There may be other instances when you can request an earlier cancellation. Check with your lender for those specific details.

Lender-paid mortgage insurance (LPMI)

Your lender pays the total insurance premium upfront, passing the cost to you through a higher interest rate on your loan. The interest rate increase is often in the range of 0.25% to 0.5%. It's also important to know that LPMI can't be canceled, but since you pay for LPMI as mortgage interest, it may be tax-deductible. Consult your tax advisor for details.

FHA mortgage insurance premium (MIP)

All FHA loans charge two types of mortgage insurance. You pay the first type upfront when you buy your home. You pay the second type annually, broken up into monthly installments. FHA MIP is for the life of the loan. The upfront insurance premium is 1.75% of the loan while the annual MIP is based on loan size and down payment amount.

Mortgage title insurance

While PMI protects the lender, mortgage title insurance protects you. If someone comes along and claims they have an ownership right to the home — such as a contractor who was never paid by the previous owner or the municipality looking to collect unpaid taxes — you're covered. You typically purchase mortgage title insurance when you buy your home and pay the premium at closing.

How much does mortgage insurance cost?

Annual mortgage insurance premiums can range from about 0.2% to more than 1% of the total loan amount. The cost will vary based on several factors, including:

• Type of loan
• Loan-to-value (LTV) ratio
• Your credit score

You'll typically pay the annual premium in equal installments, which are collected with your monthly mortgage payment.

How do I stop needing to pay mortgage insurance?

If you have a conventional loan, you don't have to pay mortgage insurance forever. The lender will automatically remove the insurance premium when one of the following happens:

• Your principal balance reaches 78% of the home's original value
• You reach the halfway point of the mortgage's term

If you purchased a home worth $400,000 and put 10% down, the PMI premium will drop off automatically once you've paid 22% of the home's value or the remaining balance is $312,000. Alternatively, the PMI premium will drop off once you hit the 15-year mark on a 30-year loan, even if you haven't paid off 22% of the original value yet.

You can also request that the lender drop PMI after you've paid 20% of the home's original value. You must be current on your payments, have a good payment history and make your request in writing. You'll also need to provide proof that the home's value hasn't dropped and that there aren't any secondary liens on the home.

If the value of your home's gone up and you refinance your mortgage, you may not have to pay PMI on the new home loan.

Mortgage insurance FAQs

What's the difference between MIP and PMI?

MIP is the mortgage insurance premium you pay on an FHA loan while PMI is the mortgage insurance you pay on a conventional home loan and typically comes from a private lender. PMI is paid monthly while MIP has two components — an upfront payment and an annual premium.

What's the difference between mortgage insurance and homeowner's insurance?

Homeowner's insurance protects the house itself, your belongings and you in case of storm damage, fire, theft and so on. Mortgage insurance protects the lender in case the borrower stops making payments on their loan.

Is PMI tax-deductible?

PMI used to be tax-deductible if you itemized deductions on your federal tax return. However, that deduction expired in 2022.

Should I avoid PMI?

PMI adds to the monthly cost of your mortgage, but for many people, it can mean the difference between buying a home and not. It can take a while to save up a full 20% down payment. Putting 5% or 10% down and paying PMI can help you buy a home sooner.

How long do I pay mortgage insurance?

How long you pay mortgage insurance depends on the loan type and your original down payment. For a conventional loan, you won't pay PMI for longer than half the loan term, but you can most likely expect the premiums to stop before that point.

Don't rule out mortgage insurance

Saving for a 20% down payment can be difficult. While mortgage insurance is an extra monthly cost, it can be the reason you move into your dream home sooner than planned. When deciding how much you can afford and how much you can put down, be sure to factor in mortgage insurance.

Thinking about buying a new home? Learn about the rates on Citizens' home loans.