What is mortgage insurance? Types, costs & removal tips

What you’ll learn ✅

— What mortgage insurance is, when it’s required, and who it protects

— What private mortgage insurance (PMI) is

— How insurance on a mortgage is calculated and how much it typically costs

— Ways to avoid mortgage insurance or get rid of it

As you explore your homebuying options, you may come across mortgage insurance — a common part of many loan programs, especially for buyers with smaller down payments. Understanding how it works can help you plan confidently and avoid surprises as you compare financing options.

In this guide, we’ll explain what mortgage insurance is, why lenders require it, and how it affects your monthly payments. You’ll also learn the different types of mortgage insurance across conventional, FHA, USDA, and VA loans, plus practical tips for lowering or removing it when you can.

What’s mortgage insurance? 🔍

Mortgage insurance is a policy that protects lenders if the borrower can’t repay the loan. 

If a homeowner has to foreclose and the sale isn’t enough to fully repay the loan, the insurance compensates the lender for the rest. This coverage reduces the lender’s risk, giving them room to approve mortgages for a wider variety of buyers.

Mortgage insurance vs. home insurance

Insurance for a mortgage protects the lender if a borrower can’t repay the loan. The policy is tied to the mortgage itself — it doesn’t insure the home or your belongings.

On the other hand, homeowners insurance protects you and your home. The policy covers damage from situations like fires, storms, or theft, and it can include liability protection if anyone gets hurt on your property. It typically helps people pay for repairs, temporary lodging after a covered event, and replacement of personal items.

When is mortgage insurance required?

There are different types of mortgage insurance depending on your loan type, and some borrowers don’t need insurance at all. For conventional loans, lenders typically require mortgage insurance when the borrower puts less than 20% down on a home. 

Common types of mortgage insurance

The type of mortgage insurance you get depends on the loan you choose. Here are the most common policies out there.

Private mortgage insurance (PMI)

Conventional loans may require borrowers to pay for PMI if they put less than 20% down on the home.

Lenders add this to your monthly payment. The cost depends on factors like your loan size, down payment, and credit score. Rates typically range from 0.2–2% of the loan amount each year. Suppose you take out a $200,000 mortgage and get a 1% PMI rate. This translates to about $166 extra per month.

The nice thing about PMI is that you won’t pay it forever. When you build about 20% equity, you can ask your lender to get rid of it. Many providers will also remove it automatically as soon as you reach 22%. 

Single-premium mortgage insurance

Single-premium mortgage insurance is an up-front fee that covers the full PMI cost at closing. Because lenders collect the full payment at once, they reduce the cost of the insurance. 

Lender-paid mortgage insurance (LPMI)

With LPMI, the lender pays the cost of PMI and charges a higher mortgage rate instead. You won’t see a separate PMI line on your bill since it’s covered by the higher rate over time.

This setup makes your monthly payment easier to follow and usually reduces the insurance’s price. The catch is that there’s no automatic point where LPMI goes away — you’ll pay it for the duration of the loan.

Federal Housing Administration (FHA) mortgage insurance

FHA loans give more buyers a path to homeownership, whether they have lower credit scores or less savings for a down payment. 

These loans require two kinds of mortgage insurance:

— An up-front mortgage insurance premium (MIP), usually 1.75% of the loan amount

— A monthly payment, typically between 0.15–0.75% of the loan amount 

The mortgage insurance is a part of monthly costs for the whole loan unless you refinance into a traditional loan later.

Mortgage insurance cost and calculation

The cost of mortgage insurance depends on the type of loan you choose and how much you put down. Here’s an example of a conventional loan with PMI:

— Home price: $450,000

— Down payment: 10%

— Loan amount: $405,000

— PMI rate: 0.8% per year

— Yearly PMI: $3,240

— Monthly cost: Approximately $270

Paying mortgage insurance is usually straightforward — lenders will typically group it into your monthly mortgage bill, alongside property taxes. You can find a specific breakdown of your costs in your loan estimate or closing disclosure. 

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How to avoid or get rid of mortgage insurance

Here’s how to get rid of mortgage insurance or avoid it from the start.

Put at least 20% down

If you apply for a conventional mortgage and put at least 20% down, it signals to lenders that you’re a lower-risk borrower. This up-front cost decreases your loan-to-value ratio (LTV), so providers drop the PMI.

Request PMI removal after building equity

If your lender charges for PMI, keep an eye on your equity. As you pay down the loan and your home’s value changes, you’ll eventually be able to remove the insurance — usually once equity is around 20%. 

Get a Veterans Affairs (VA) loan

Eligible service members, veterans, and surviving spouses can purchase a home with a VA loan, which eliminates the need for mortgage insurance. Instead, the VA charges a one-time funding fee that’s typically more affordable than insurance in the long term.

Refinance your home

Refinancing into a new loan can remove the mortgage insurance requirement. A refinance gives you a fresh loan with new terms, including updating your mortgage rate and type. For example, if property values increased in the past years, your LTV drops, increasing your equity. After an appraisal, a lender may issue a new mortgage without the insurance.

With Better, you can refinance your loan fast. See for yourself: Hear a success story from one of our happy borrowers.

How mortgage insurance fits into your plan

Mortgage insurance seems a little overwhelming, but it’s a normal part of buying a home for many borrowers. If you’re looking to simplify your journey, try Better’s fully digital process.

Better makes buying a home stress free and simple. Apply in minutes, compare loan rates, and track your progress from a quick dashboard. And if you have any questions along the way, ask Better’s team of experts to learn more about any part of the journey.

Find your dream home confidently with Better.

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