Mortgage insurance is insurance paid for by the borrower to protect the lender if the borrower defaults on the mortgage. It does not protect the borrower, but it may allow a borrower to buy a home with less than 20% down on certain loan types.
What Is Mortgage Insurance and Why Do Some Homebuyers Need It?
When buying a home, one of the biggest questions borrowers often ask is: Do I need mortgage insurance?
In many cases, if you make a down payment of less than 20% on a conventional conforming loan, your lender may require the loan to be insured in some way. This is where mortgage insurance comes in.
Mortgage insurance can be an important part of the home loan process because it helps make homeownership possible for buyers who may not have a full 20% down payment saved.
What Is Mortgage Insurance?
Mortgage insurance is insurance paid for by the borrower to a third-party mortgage insurance company to help protect the lender from financial loss if the borrower defaults on the loan.
It is important to understand that mortgage insurance does not protect the borrower. Instead, it protects the lender.
The main benefit to the borrower is that mortgage insurance may allow them to purchase a home with less money down.
Why Is 20% Down Considered Important?
You may have heard that putting 20% down on a home can help you avoid mortgage insurance. That is because 20% is often considered the “magic number” in mortgage lending.
Generally, when a borrower puts down less than 20% on a conventional conforming loan, the lender has more risk. Mortgage insurance helps reduce that risk for the lender.
For many buyers, saving a full 20% down payment can take years. Mortgage insurance may help qualified borrowers buy sooner instead of waiting until they have a larger down payment.
Does Mortgage Insurance Protect the Borrower?
No. Mortgage insurance does not protect the borrower.
This is one of the most common misunderstandings about mortgage insurance. Even though the borrower usually pays for it, the insurance is designed to protect the lender if the borrower defaults on the mortgage.
However, mortgage insurance can still benefit the borrower indirectly because it may open the door to loan options that require less than 20% down.
When Is Mortgage Insurance Required?
Mortgage insurance is commonly required when a borrower makes a down payment of less than 20% on certain conventional loans.
However, mortgage insurance requirements can vary depending on:
- The loan type
- The down payment amount
- The borrower’s credit profile
- The lender’s guidelines
- The overall mortgage program
Some loans may require mortgage insurance, some may not require it, and with certain loan types, it may not be avoidable.
Are There Different Types of Mortgage Insurance?
Yes. There are different forms of mortgage insurance, and the right option depends on your specific loan program and financial situation.
Some mortgage insurance may be paid monthly as part of your mortgage payment. Other options may involve different payment structures depending on the loan type and lender guidelines.
Because mortgage insurance can vary, it is a good idea to speak with a mortgage loan originator who can explain your options clearly.
How Much Does Mortgage Insurance Cost?
Mortgage insurance is priced as a percentage of your loan amount, and the exact rate depends on the loan program, your credit score, your down payment (loan-to-value ratio), and your debt-to-income ratio. Here is what Florida borrowers typically see:
- Private mortgage insurance (PMI) on conventional loans generally runs between 0.2% and 2% of the loan amount per year, with most borrowers landing in the 0.5% to 1% range. A borrower with a 760 credit score and 10% down pays noticeably less than a borrower with a 640 score and 3% down.
- FHA mortgage insurance premium (MIP) has two parts: an upfront premium of 1.75% of the loan amount (usually rolled into the loan) plus an annual premium, typically around 0.55% for most 30-year FHA loans, paid monthly.
- VA loans charge no monthly mortgage insurance at all. Eligible veterans pay a one-time funding fee instead, and many are exempt. See Do VA Loans Have PMI? for the details.
To put that in local terms: on a home near Melbourne’s roughly $315,000 median price with 5% down, the loan amount is about $299,000. At a 0.5% PMI rate that adds about $125 per month; at 1% it is closer to $250 per month.
| PMI rate | Loan amount | Approx. monthly PMI |
|---|---|---|
| 0.5% | $299,000 | $125 |
| 0.75% | $299,000 | $187 |
| 1.0% | $299,000 | $249 |
PMI can be paid in a few different ways. Most buyers pay it monthly as part of their PITI payment (principal, interest, taxes, and insurance). Some lenders also offer single-premium PMI (paid as a lump sum at closing), split-premium PMI (part upfront, part monthly), or lender-paid PMI, where the lender covers the premium in exchange for a slightly higher interest rate. You can model these scenarios yourself with our mortgage calculators, or ask us for a side-by-side quote.
Can You Avoid Mortgage Insurance?
In some cases, yes. Borrowers may be able to avoid mortgage insurance by putting at least 20% down on a conventional loan.
However, that is not always the best choice for every buyer. Some borrowers prefer to keep more money available for moving costs, repairs, emergency savings, or other financial goals.
The best option depends on your complete financial picture.
If you are buying with less than 20% down, there are still ways to lower or skip the premium, including lender-paid PMI, piggyback second mortgages, and (for eligible veterans) a VA loan with no monthly mortgage insurance. We walk through each option in How to Avoid PMI on Conventional Loans.
How Do You Get Rid of Mortgage Insurance?
Mortgage insurance is not permanent on most loans. How you remove it depends on the loan type:
Conventional loans (PMI)
- Request cancellation at 80% loan-to-value. Under the federal Homeowners Protection Act, once your balance reaches 80% of the home’s original value you can ask your servicer in writing to cancel PMI. You generally need a good payment history and no second liens, and the servicer may require an appraisal.
- Automatic termination at 78%. When your balance hits 78% of the original value based on the original amortization schedule, the servicer must cancel PMI automatically as long as you are current on payments.
- Use a new appraisal if your home has appreciated. Many servicers will cancel PMI based on current market value once you have had the loan for at least two years and reach roughly 75% to 80% LTV. Given how Brevard County values have moved, this is often the fastest route.
- Pay down the balance or refinance. Extra principal payments get you to 80% sooner, and refinancing into a new loan at 80% LTV or below removes PMI entirely. Just make sure the closing costs of a refinance are worth the monthly savings.
FHA loans (MIP)
FHA loans work differently. If you put less than 10% down, the annual MIP stays for the life of the loan; with 10% or more down it drops off after 11 years. For most FHA borrowers, the way out is refinancing into a conventional loan once they have 20% equity.
For the full step-by-step process, including what to say to your servicer and how to time an appraisal, read our guide to removing PMI from an existing mortgage.
Why Mortgage Insurance Can Be Helpful for Homebuyers
While many borrowers would prefer not to pay mortgage insurance, it can serve an important purpose.
Mortgage insurance may help qualified buyers:
- Purchase a home with less than 20% down
- Enter the housing market sooner
- Preserve cash for other expenses
- Qualify for certain loan options
- Avoid waiting years to save a larger down payment
For the right borrower, mortgage insurance can be a useful tool in the homebuying process.
Talk to a Mortgage Professional About Your Options
There are many different forms of mortgage insurance. Some loans do not require it, and with some loans, it cannot be avoided.
That is why it is recommended that you contact a mortgage loan originator at Morgan Financial to review your options and choose the home loan program best suited for your specific situation.
Final Thoughts
Mortgage insurance is insurance paid by the borrower to help protect the lender from default. It does not protect the borrower directly, but it may allow borrowers to purchase a home with less than 20% down on certain loan types.
Do you have a home loan related question that you want answered? We want to hear from you.
Contact Morgan Financial today to speak with a mortgage professional about your options.
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