What is mortgage insurance? Types, costs, and how it works

If your down payment is on the smaller side, mortgage insurance can help make homeownership a reality. While buying a home involves more than just principal and interest payments, a down payment that’s less than 20% doesn't have to be a deal-breaker. Mortgage insurance is an often-overlooked tool that can open doors for buyers who aren't quite ready to put down a larger amount. Before you start rate shopping, let's explore what this cost means for your budget and your dream of owning a home.

Key takeaways:

1. Mortgage insurance protects the lender, not you: It reimburses the lender if you default. It won't cover your payments if you lose your job or hit a rough patch.
2. It shows up most often with smaller down payments: Conventional loans typically require private mortgage insurance (PMI) below 20% down, while FHA, USDA, and VA loans each handle it differently.
3. Some of it goes away, some doesn't: PMI can often be canceled once you build enough equity. FHA mortgage insurance premiums (MIP) may last for the life of the loan, depending on your down payment.

What is mortgage insurance?

The idea of mortgage insurance may be new to many first-time home buyers. Mortgage insurance reimburses your lender for its losses if you default on your loan. It doesn't protect you, and it won't step in if you lose your job or fall behind for other reasons.

Who does mortgage insurance protect?

Mortgage insurance exists to make lenders comfortable extending credit to borrowers who put down less than 20% or who take on a government-backed loan with its own insurance structure.

If you stop paying and the loan goes to foreclosure, the insurer reimburses the lender for part of its loss. Your family's finances and your credit still take the hit either way.

Who pays mortgage insurance?

You do, in most cases. Depending on the type of mortgage insurance, you'll pay it as a monthly premium added to your mortgage payment, an upfront payment at closing, or a combination of both. A few loan structures shift the cost to the lender instead, but this usually comes with a higher interest rate.

When is mortgage insurance required?

Whether you'll pay mortgage insurance, and what kind, depends on your loan type.

Conventional loans

A conventional mortgage typically requires PMI once your down payment drops below 20%.

FHA loans

Federal Housing Administration (FHA) loans require both an upfront and an annual mortgage insurance premium, regardless of your down payment size.¹

USDA loans

Mortgage insurance for USDA loans doesn’t apply at all. Instead, they charge an upfront and an annual guarantee fee. Rocket Mortgage does not offer USDA loans currently.

VA loans

VA loans don't require mortgage insurance, but most borrowers pay a one-time funding fee instead.²

How much is mortgage insurance?

PMI generally costs between 0.1% and 2% of your loan amount each year, and your credit score and down payment size both move that number.

How to estimate PMI on a $300,000 home

Say you take out a $300,000 mortgage with PMI. At 0.1%, you'd pay $300 per year, or $25 per month. At 2%, you'd pay $6,000 per year, or $500 per month. To estimate your own PMI, multiply your loan amount by the annual PMI rate, then divide by 12 to get your monthly add-on.

Factors that can affect PMI cost

A stronger credit score and a larger down payment generally lower your PMI rate, since both signal less risk to the lender. Someone with excellent credit and a 15% down payment will usually pay less than someone with weaker credit putting down the minimum.

How borrowers pay for PMI

Most lenders roll PMI into your monthly mortgage payment, so it's worth including when you calculate your mortgage payment. Paying the whole premium upfront is possible with some policies, but it's less common and ties up more cash at closing. Either way, ask your lender for the exact PMI cost before you commit to a loan.

Types of PMI

PMI comes in four common structures, and the difference is mostly in how you pay.

• Borrower-paid PMI: The most common setup. It's added to your monthly mortgage payment for as long as you carry it.
• Single-premium PMI: You pay the entire premium upfront at closing, which means no monthly PMI charge, but a bigger bill on closing day.
• Split-premium PMI: A hybrid. Part of the premium is paid upfront, and the rest is spread across a reduced monthly payment.
• Lender-paid PMI: The lender covers the premium and typically charges a higher interest rate to offset it. You won't see a separate PMI line item, but you'll likely pay more over the life of the loan than you would with borrower-paid PMI at a lower rate.

FHA mortgage insurance premiums

FHA loans charge an upfront mortgage insurance premium of 1.75% of the loan amount, on top of an annual premium that generally runs from 0.15% to 0.75% depending on your loan term, loan-to-value ratio, and loan amount.¹

How MIP works

Imagine you borrow $400,000 with an FHA loan, a 30-year term, and a 10% down payment. Your upfront MIP would be $7,000, which you can pay at closing or roll into your loan balance.

Your annual MIP would be calculated as a percentage of your loan amount and split into monthly payments added to your mortgage bill for as long as it applies.

How long do you pay mortgage insurance?

PMI and FHA MIP follow different clocks, so it's worth tracking both if you're comparing loan types.

When PMI can be canceled

The Homeowners Protection Act of 1998 mandates that you can ask your lender to cancel PMI once you reach 20% equity, and your lender must automatically cancel it once you hit 22% equity or the midpoint of your loan term, whichever comes first. In order to take advantage of this, you must be current on payments.

If your home's value has climbed or you've made substantial improvements, you may be able to get there sooner by refinancing or requesting a new appraisal.

When FHA MIP ends

If your original down payment was at least 10%, annual MIP can end after 11 years. Below 10% down, it runs for the life of the loan unless you refinance out of it.

How to avoid PMI

A few paths can keep PMI off your mortgage bill entirely or get PMI removed once you're in the loan.

Make a larger down payment

Putting at least 20% down on a conventional loan is the most direct way to skip PMI altogether.

Get a loan that doesn't require mortgage insurance

VA and USDA loans don't carry mortgage insurance, though both come with their own fees instead.

VA loans are available to active-duty service members, veterans, and eligible surviving spouses, with a one-time funding fee. The fee generally runs from 1.25% to 3.3% of the loan amount, although it’s 0.5% for the Interest Rate Reduction Refinance Loan^3,4.

Depending on your down payment and how many times you've used your VA loan benefit. You can pay it at closing or roll it into your loan balance.

USDA loans serve low- to moderate-income borrowers buying in eligible rural areas, and they charge a guarantee fee instead of PMI: an upfront fee currently set at 1% of the loan amount, plus an annual fee of 0.35% of the outstanding balance. Like the VA funding fee, the upfront portion can typically be financed into your loan rather than paid out of pocket at closing.

Rocket Mortgage does not offer USDA loans currently.

Cancel PMI when you have 20% equity

The standard path to cancellation is reaching 20% equity based on your original amortization schedule, and you can get there faster by paying down your balance ahead of schedule.

You may also be able to cancel earlier if your home's market value has risen or you've made improvements that meaningfully increase its worth, though your lender will typically want a new appraisal to confirm it.

Is mortgage insurance worth it?

It depends on what it buys you. Mortgage insurance adds to your monthly cost, but it's also what makes a smaller down payment possible in the first place.

Benefits of mortgage insurance

• Lower entry barrier: You don't need to save a full 20% down payment to buy.
• More buying power: A smaller required down payment can put more homes within reach.
• Cash flow flexibility: Keeping more cash on hand at closing leaves room for moving costs, repairs, or a reserve fund.

Drawbacks of mortgage insurance

• It adds to your cost: You're paying for a policy that protects your lender, not you.
• It doesn't build equity: Unlike your principal payment, mortgage insurance premiums don't reduce what you owe.

Mortgage insurance vs. other insurance and fees

It's easy to lump mortgage insurance in with other homeownership costs, but each one covers something different.

PMI vs. mortgage protection insurance

PMI protects your lender if you default. Mortgage protection insurance is a separate, voluntary policy that can help your family keep the home if something happens to you.

Mortgage protection insurance vs. life insurance

Mortgage protection insurance is narrower than a typical life insurance policy. It's generally built to pay off your mortgage balance specifically, rather than giving your family a lump sum they can use however they need.

PMI vs. MIP

PMI applies to conventional loans. MIP applies to FHA loans and follows its own upfront and annual fee structure, separate from PMI's rules.

PMI vs. homeowners insurance

PMI protects your lender against default. Homeowners insurance protects you, covering damage to your home and belongings. Lenders require it too, since it's what lets you repair or rebuild your home to at least its former condition if it's damaged, protecting their collateral along with your investment.

You'll typically need both if you're financing a home with a smaller down payment.

FAQ

Here's what borrowers ask most often about mortgage insurance.

Do you get mortgage insurance back?

Generally, no. Mortgage insurance premiums pay for coverage during the period you have it, like any other insurance policy. The exception is upfront FHA MIP, which may be partially refundable if you refinance into a new FHA loan within three years.

What does mortgage insurance cover?

It reimburses your lender for its losses if you default on your loan. It doesn't cover your mortgage payments, your home's structure, or your belongings.

Is PMI tax-deductible?

For tax years 2022 through 2025, no. Congress let the mortgage insurance premium deduction lapse after the 2021 tax year.

Federal tax legislation restored it starting with the 2026 tax year, allowing mortgage insurance premiums to be treated as deductible qualified residence interest if you itemize. The deduction phases out at higher income levels, so check with a tax professional about whether it applies to your situation.

The bottom line: Mortgage insurance makes homeownership more accessible

Mortgage insurance adds to your monthly cost, but it's also what lets many borrowers buy sooner, with less saved for a down payment. Whether that trade-off makes sense depends on your finances, your timeline, and how long you plan to carry the extra cost.

If you're ready to see what you qualify for, start your application and get a clearer picture of your options.

This article is for informational purposes only and is not intended to provide, and should not be relied on for, medical, legal, financial, or tax advice. You should consult with a qualified professional for advice specific to your situation. Consumers should independently verify that any services, products, or programs referenced meet their needs and comply with applicable requirements.

¹ Rocket Mortgage is not acting on behalf of FHA or HUD.

² Rocket Mortgage is a VA-approved lender, not endorsed or sponsored by the Dept. of Veterans Affairs or any government agency.

³ The VA Streamline program may have stricter requirements in some states. In order to qualify for the VA Streamline program, you must have a VA loan. The VA Streamline is only available on primary residences. Cash-out transactions are not allowed. In order to qualify for a VA Streamline, a 0.5% minimum reduction in interest rate on the previous fixed-rate loan must occur if the new loan will be a fixed rare or a 2% minimum reduction in interest rate on previous adjustable-rate mortgage loan must occur; a minimum of 6 months of consecutive mortgage payments must be paid on the current loan at the time of application. Some states may require an appraisal. Additional restrictions/conditions may apply.

⁴ Refinancing may increase finance charges over the life of the loan.

This article is for informational purposes only and is not intended to provide financial, investment, or tax advice. You should consult a qualified financial or tax professional before making decisions regarding your retirement funds or mortgage.

Rocket Mortgage is a trademark or service mark of Rocket Mortgage, LLC or its affiliates.