Do I Need Mortgage Insurance?

Couple embracing each other as they look at their new house outside from their front lawn.

You can generally avoid paying for mortgage insurance if you make at least a 20% down payment when you buy a home. There are also some lenders and government programs that offer mortgages with lower down payments and no mortgage insurance requirement, although they may be more expensive in other ways.

What Is Mortgage Insurance?

Mortgage insurance protects your lender in case you can't afford to pay your mortgage in the future. Don't confuse it with homeowners insurance, which protects you in case something happens to your home.

Mortgage insurance can come in several forms depending on the type of mortgage you get:

If you have a conventional mortgage and are paying for PMI, you may be able to get rid of the insurance and stop making payments once you've established 20% equity in your home (in other words, when your remaining loan balance drops to less than 80% of the home's value). For government-backed FHA and USDA loans, you may have to pay mortgage insurance for the entirety of the loan.

How Much Does Mortgage Insurance Cost?

Mortgage insurance costs vary depending on several factors, including the type of loan you have. Annual PMI costs on conventional loans average about 0.55% to 2.25% of the loan amount depending on your down payment, your credit and the lender. If you're not sure where your credit stands, find out your credit score to see how it could affect your PMI (and your loan's interest rate and terms).

Annual mortgage insurance rates on USDA loans are 0.35% of the loan amount, while they can range from 0.45% to 1.05% for FHA loans depending on your down payment. USDA and FHA loans also require an upfront payment, which is usually 1% and 1.75%, respectively.

As an example, if you buy a $300,000 home with a 5% down payment, you'll borrow $285,000. If you get a 4% interest rate and 30-year term, you may pay an additional $83 (0.35%) to $534 (2.25%) a month for the insurance premium.

Do Conventional Mortgage Loans Require Insurance?

Conventional mortgages offered by private lenders may require PMI if you put down less than 20% when you buy a home. However, some lenders offer mortgages with lender-paid PMI, which means you won't have to pay for the insurance. Instead, you may have to pay a higher interest rate, which can wind up costing you more money in the long run.

If you have to pay for PMI, you may be able to pay the full amount upfront, pay it monthly or use a combination of the two. Monthly payments are the most common option, and your insurance payment will be bundled with your mortgage payment

You'll have to continue paying for PMI on your conventional loan until one of the following scenarios occurs:

  • You reach the date when the loan balance is 80% or less than the home's original value, and you request PMI cancellation.
  • You request an earlier PMI cancellation because you've made extra payments and the loan balance is 80% or less than the home's original value before the expected date.
  • The PMI is automatically removed because your loan balance is 78% of the home's original value.

Paying for PMI upfront means your monthly payment will be lower and you won't need to request a cancelation later, but it will add to your upfront costs as the fee could be equivalent to several years' worth of premiums. An upfront payment could wind up costing you less in the long run than making monthly payments until you build 20% equity in the home, but it depends on the upfront fee and your down payment.

Do FHA Mortgage Loans Require Insurance?

FHA loans may require lower down payments (3.5%) and have less strict credit requirements than conventional mortgages. However, FHA mortgage loans may require both an upfront mortgage insurance premium (UFMIP) and an annual MIP, which you can pay monthly.

Unlike with PMI, you can't request to cancel your FHA loan's MIP after you reach 20% equity, and it won't be automatically removed once you reach 22% equity. In fact, if your down payment is less than 10%, the PMI will remain for the lifetime of the loan.

If you put down at least 10% on your FHA loan, the MIP will be removed after 11 years. Alternatively, you could refinance your mortgage once you've established 20% equity to get a new mortgage that doesn't require mortgage insurance.

How to Avoid Paying for Mortgage Insurance

If you qualify, a VA loan could allow you to buy a home with no down payment and no mortgage insurance. Otherwise, the most straightforward way to avoid paying for mortgage insurance is to get a conventional loan and make a down payment of at least 20%. If you can't afford 20% down, you can look for a lender that offers lender-paid PMI, but the loan may have a higher interest rate.

You may also be able to find a piggyback, or 80-10-10, loan to avoid PMI. With this arrangement, you put 10% down, get a loan to cover the other 10% of your down payment and take out the mortgage for 80% of the purchase. These types of arrangements aren't as common as they used to be, however, and the cost for the 10% loan might be more than you'd wind up paying for PMI.

Shop Mortgage Lenders and Loan Options

While mortgage insurance can increase your monthly payment, it may be a small price to pay to move into a home of your own. If you're ready to buy a home, shop around to find loan options and offers from different mortgage lenders. Compare the total cost, including the closing costs, interest and mortgage insurance, to find the option that will work best. And remember, even if you have to pay for mortgage insurance now, you may be able to remove it later.