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Mortgage Insurance – What It Is and When You Need It


If you're buying a home with less than 20% down, you've probably heard about mortgage insurance. But what exactly is it, and is it worth the cost? Let's break down everything you need to know about this often-misunderstood protection.



What is Mortgage Insurance?

Mortgage insurance protects the lender (not you) if you stop making payments. There are two main types:

1. Private Mortgage Insurance (PMI)

For conventional loans with less than 20% down payment

2. Mortgage Insurance Premium (MIP)

For FHA loans (required regardless of down payment)

How Mortgage Insurance Works

  • You pay a monthly premium (or upfront fee)
  • The lender gets paid if you default
  • Doesn't cover your losses - just the bank's

Typical Costs

PMI usually costs 0.5% to 1.5% of the loan annually:

  • $300,000 loan = $1,500 to $4,500 per year
  • Added to your monthly payment

When Is It Required?

  • Conventional loans with <20% down
  • All FHA loans
  • Some special loan programs

How to Remove Mortgage Insurance

For conventional loans:

  • Automatic at 78% loan-to-value ratio
  • Can request removal at 80% LTV
  • Through home value appreciation or extra payments

For FHA loans:

  • Must refinance to remove (in most cases)

Alternatives to Mortgage Insurance

  1. Save for a 20% down payment
  2. Use a piggyback loan (80-10-10 structure)
  3. Look for lender-paid MI options
  4. Consider VA loans (if eligible - no MI required)

Pros and Cons

Advantages:

  • Allows home purchase with smaller down payment
  • May help qualify for better interest rates

Disadvantages:

  • Increases monthly payments
  • Doesn't provide borrower protection
  • Can be difficult to remove (FHA)

5 Smart Tips

  1. Shop multiple lenders - PMI rates vary
  2. Make extra payments to reach 20% faster
  3. Consider refinancing when you have enough equity
  4. Get a new appraisal if home values rise significantly
  5. Ask about lender-paid MI options

Final Thoughts

Mortgage insurance helps many Americans become homeowners sooner, but it's an added cost. Understand your options, calculate the true cost, and have a plan to remove it when possible. For some buyers, waiting to save a larger down payment might be the smarter financial move.

Have experience with mortgage insurance? Share your story in the comments!