Mortgage insurance is very different from the typical types of insurance we buy to protect ourselves from financial loss. Usually, we pay an insurance company a monthly premium to cover our home, car, or even health from an unexpected setback. 

But mortgage insurance doesn't protect a home buyer — it protects the lender from a financial loss if you don't repay your mortgage loan. However, you still benefit in a way.

Dig deeper: A guide for first-time home buyers

What is mortgage insurance?

Mortgage insurance was developed to encourage lenders to expand their loan offerings to home buyers with limited savings. By charging borrowers a fee (or premium), lenders build a financial cushion to help defray losses from the small percentage of loans that default. That cushion allows lenders to offer loan programs with lower down payments and more lenient credit guidelines. 

So, while borrowers pay an insurance premium that benefits mortgage lenders, it allows more people to qualify for homeownership despite the extra monthly cost.

Dig deeper: What to expect when you default on your mortgage

Do I need mortgage insurance?

If you can qualify for a conventional loan and make at least a 20% down payment, you won't need to purchase mortgage insurance. But other situations will require mortgage insurance of one sort or another. 

Mortgage insurance can be labeled differently, depending on the type of mortgage you are applying for.

Types of mortgage insurance

Private mortgage insurance

When a borrower makes a down payment of less than 20% on a conventional loan, they must purchase private mortgage insurance (PMI) . PMI premiums get baked into a borrower's monthly mortgage payment, but can also be an up-front payment made when closing on a house. 

FHA mortgage insurance

All FHA loans charge mortgage insurance premiums (MIPs) . It is an up-front fee paid at closing or carried into the total loan amount, as well as a premium added to the monthly mortgage payment. 

VA funding fee

Loans guaranteed by the Department of Veterans Affairs don't charge mortgage insurance, but VA loans have an initial "VA funding fee." This fee helps fund the VA loan program for future borrowers and offers funding fee waivers to service members who qualify due to injury or other exceptional circumstances while serving their country. It's not mortgage insurance, but it's often mentioned in the same breath.

USDA mortgage insurance

USDA loans are mortgages insured by the Department of Agriculture. Insurance premiums are paid at closing or rolled into the loan balance and are also due monthly. USDA mortgage insurance is usually referred to as a "guarantee fee."

Mortgage protection insurance

Mortgage protection insurance is a life insurance policy that pays your mortgage should you become unable to make your payments or die before you pay off your loan. Your mortgage lender is listed as the beneficiary of the policy instead of your family members, and your lender uses the payout to cover monthly payments or pay your loan off in full.

Mortgage protection insurance (also called mortgage protection life insurance) can be useful to people who cannot qualify for or afford traditional life insurance due to illness or a high-risk job. 

Mortgage title insurance

Mortgage title insurance isn't technically mortgage insurance. Instead, it protects home buyers and lenders from any financial losses if there's an issue with the title, such as if the seller didn't have a legal claim to the house or if they had outstanding liens. Mortgage title insurance remains in place the entire time you own the property.

How much is mortgage insurance?

As we've seen, what mortgage insurance is called varies based on the mortgage type. The cost of mortgage insurance differs as well.

Conventional loans :PMI costs are based on your loan amount, down payment, and credit score. It can be an up-front fee, an ongoing monthly charge, or both. According to Freddie Mac, monthly PMI costs are roughly $30 to $70 for every $100,000 you borrow.

FHA loans :The up-front MIP will cost 1.75% of the loan amount. For example, on a $200,000 loan, it would total $3,500 to be paid at closing or added to the loan amount. Ongoing annual premiums range from 0.15% to 0.75% of the remaining financed mortgage balance, divided by 12 and added to the monthly payment. Say your outstanding balance on your original $200,000 loan was $193,000 after a 3.5% ($7,000) down payment. If your MIP is 0.5%, your annual MIP would be $965, with a monthly premium of just over $80 added to your mortgage payment.

VA loans :VA loan funding fees are based on the type and amount of the loan and the down payment and range from 1.25% to 2.15% for first-time loans. The VA funding fee is waived for borrowers with service-connected disabilities or in some other instances. Your exemption status should be reflected in your VA Certificate of Eligibility (COE) .

USDA loans :The guarantee fee on USDA loans is an upfront 1% and an ongoing annual fee of 0.35% of your loan balance.

Mortgage protection insurance:Mortgage protection insurance prices are calculated based on your age, the amount of coverage you want, the purchase price of the home, and the term of coverage, usually expressed in years. Depending on those factors, the monthly cost can be up to $100.

Mortgage title insurance:Unlike other types of mortgage insurance that are paid monthly, mortgage title insurance is paid in a lump sum along with your other closing costs. The cost varies by state and typically ranges from 0.5% to 1% of the home's purchase price.

Learn more: Closing costs — A guide to how they work and how much you'll pay

Mortgage insurance rates

Your up-front VA funding fee rate depends on two factors: your down payment amount and whether this is your first VA loan. 

You'll pay 1.25% with a down payment of 10% or more and 1.50% with a down payment of 5% to 10%, regardless of whether this is a first or subsequent VA loan. The only difference is that if you make a down payment of less than 5%, your rate will be 2.15% for the first loan but 3.30% for a subsequent loan.

Your FHA annual premium depends on a variety of factors, including your loan term length and your loan-to-value (LTV) ratio .

Is mortgage insurance tax-deductible?

President Trump's sweeping 2025 tax bill restored a previously expired provision allowing mortgage insurance premiums to be deducted. They are once again tax deductible, essentially treated as a form of mortgage interest for tax purposes.

How to cancel mortgage insurance

Canceling PMI

Generally, PMI can be canceled once a homeowner has 20% equity in the home. This can be achieved by reducing the principal loan balance through mortgage payments or by increasing a home's current market value, though you'll probably have to pay for an appraisal.

A lender may also automatically cancel PMI once your home equity reaches 22%, but it's worth contacting your lender or loan servicer to confirm that.

PMI can also be canceled once you are halfway through your loan term, for example, having paid 15 years on a 30-year loan.

Canceling FHA mortgage insurance

With a down payment of 10% or more, your lender will cancel your FHA mortgage insurance payments after 11 years. Loans with a down payment of less than 10% pay MIP for the life of the loan. 

Those with FHA loans can also refinance into a conventional mortgage after they have 20% equity in their homes as an alternative way to stop paying PMI.

Canceling the VA funding fee

VA loan funding fees are financed as a part of the loan last the loan's lifetime. However, there are no ongoing charges if you pay the funding fee at closing.

There are ways to qualify for a refund of the VA funding fee under certain circumstances. All require that the benefit be backdated before you closed on your VA loan.

Canceling USDA mortgage insurance

The ongoing annual mortgage insurance premium lasts for the life of the loan. 

Canceling mortgage protection insurance

Like most life insurance policies, mortgage protection insurance can be canceled anytime. You simply need to notify your insurer via phone or mail that you need to cancel your policy and stop making monthly payments.

Canceling mortgage title insurance

Since you must pay for mortgage title insurance in an up-front lump sum, it is uncommon to cancel your title insurance after purchasing it.

Mortgage insurance FAQs

What is the point of mortgage insurance?

Mortgage insurance protects your mortgage lender from losses should you default on your mortgage. It's different from homeowners insurance , which protects you if anything goes wrong with your house, such as a hurricane or robbery.

How long do you pay for mortgage insurance?

It depends on what type of loan you have. With a conventional mortgage, you can cancel private mortgage insurance (PMI) as early as when you reach 20% equity in the home. You'll pay FHA mortgage insurance for the life of the loan unless you made a 10% down payment — then it will be removed after 11 years. USDA mortgage insurance lasts for the entire mortgage term. The VA funding fee can be a one-time fee at closing, or you may choose to roll it into your mortgage and pay it off over your term.

Is it better to pay PMI or put 20% down?

The decision to pay PMI or put 20% down really comes down to your financial situation. Loans requiring PMI tend to offer buyers lower down payment options and have more flexible credit qualification guidelines. These buyers may not be able to afford a 20% down payment. However, if you can comfortably put 20% down on a home, you could enjoy a lower monthly mortgage payment without the PMI premium.

Laura Grace Tarpley edited this article.