Why Pay Mortgage Insurance and How Can You Stop?

Mortgage insurance is a common aspect of homeownership, particularly for those who do not make a large down payment. Understanding its purpose and how it functions can help homeowners navigate their mortgage obligations effectively. This insurance plays a specific role in the lending landscape, making home financing accessible to a wider range of buyers.

Understanding Mortgage Insurance

Mortgage insurance is an insurance policy designed to protect the mortgage lender, not the borrower, in the event of a loan default. When a borrower fails to make mortgage payments, this insurance helps to mitigate the financial risk for the institution that issued the loan. Its primary function is to safeguard the lender from potential losses that could arise if a property’s foreclosure sale does not cover the outstanding mortgage balance.

This protection allows lenders to extend financing to individuals who might not otherwise qualify for a conventional mortgage without a substantial down payment, thereby expanding access to homeownership by reducing the lender’s risk. Although the borrower pays the premiums, the direct beneficiary of the policy is the lender, highlighting its role as a risk management tool.

Mortgage insurance is distinct from homeowner’s insurance, which protects the homeowner from damages to the property. While both are typically part of monthly housing costs, mortgage insurance specifically addresses the lender’s financial security related to the loan itself. This distinction is important for borrowers to recognize, as the coverage does not protect them from losing their home through foreclosure if payments are not met.

When Mortgage Insurance is Required

Mortgage insurance is required under specific financial circumstances related to the home loan. For conventional loans, which are not backed by a government entity, mortgage insurance is mandated when a borrower’s down payment is less than 20% of the home’s purchase price. This translates to a loan-to-value (LTV) ratio greater than 80%.

When a borrower makes a smaller down payment, the lender faces increased risk, and mortgage insurance offsets this elevated risk. The 20% down payment threshold is a widely recognized standard for conventional loans. Achieving this down payment amount can prevent the need for mortgage insurance from the outset.

Government-backed loans, such as those from the Federal Housing Administration (FHA), require mortgage insurance regardless of the down payment size. Other government-backed programs, like those offered by the U.S. Department of Agriculture (USDA) and the Department of Veterans Affairs (VA), also include comparable fees that serve a similar protective function for the lender.

Types of Mortgage Insurance

Borrowers encounter different forms of mortgage insurance depending on their loan type. Private Mortgage Insurance (PMI) is associated with conventional loans and is required when the down payment is less than 20% of the home’s value. PMI premiums can be paid monthly, as a single upfront payment at closing, or a combination of both. The annual cost of PMI ranges from 0.5% to 1.86% of the loan amount, influenced by factors such as down payment size, credit score, and loan amount.

For FHA loans, the equivalent is the Mortgage Insurance Premium (MIP). MIP involves two components: an Upfront Mortgage Insurance Premium (UFMIP) and an annual MIP. The UFMIP is a one-time fee, currently 1.75% of the loan amount, paid at closing or financed into the loan. The annual MIP is paid monthly and ranges from 0.15% to 0.75% of the outstanding loan balance, with a common rate of 0.55% in 2025.

VA loans, available to eligible service members, veterans, and surviving spouses, do not have monthly mortgage insurance. Instead, they include a one-time VA Funding Fee. This fee is a percentage of the loan amount, which varies based on factors like the borrower’s military category, first-time or subsequent VA loan, and down payment amount. The VA Funding Fee is paid at closing, though it can be financed into the loan.

USDA loans, designed for rural properties, require specific fees. These include an upfront guarantee fee and an annual fee. The upfront guarantee fee for USDA loans is 1% of the loan amount in 2024, which can be paid at closing or rolled into the loan. An annual fee is charged, paid in monthly installments, and is calculated based on the remaining principal balance.

Strategies to End Mortgage Insurance Payments

Borrowers seeking to stop paying mortgage insurance have different paths depending on their loan type. For conventional loans with Private Mortgage Insurance (PMI), termination is possible once a certain amount of equity is achieved. PMI can be canceled when the loan balance reaches 80% of the home’s original value, initiated by the borrower through a request to their loan servicer.

The Homeowners Protection Act of 1998 mandates automatic termination of PMI for conventional loans once the loan balance reaches 78% of the original value of the home, provided the borrower is current on payments. Making additional principal payments can accelerate reaching these equity thresholds, allowing for earlier PMI removal.

Refinancing a conventional loan can eliminate PMI if the home’s value has increased, or the loan balance has been paid down sufficiently to achieve at least 20% equity. This approach involves securing a new loan without the PMI requirement. However, refinancing incurs closing costs, which should be weighed against the savings from ending PMI.

For FHA loans, removing the Mortgage Insurance Premium (MIP) is more challenging. For FHA loans originated after June 3, 2013, if the initial down payment was less than 10%, MIP remains for the entire life of the loan. If the down payment was 10% or more, MIP is required for at least 11 years. The most common method to eliminate MIP on FHA loans is to refinance into a conventional loan once sufficient equity, 20%, has been built.