Updated November 22, 2023
Mortgage insurance is an added cost for many homebuyers, required in many homebuying scenarios to protect mortgage lenders. For conventional loans, this premium is commonly called private mortgage insurance (PMI), and for FHA loans it’s called mortgage insurance premium (MIP). Borrowers may benefit from more lenient down payment requirements in exchange for added mortgage insurance requirements.
In general, conventional mortgages require a 20% down payment of the sales price to avoid PMI. For example: If you're purchasing a $300,000 home, you'll need a down payment of at least $60,000. Saving that much cash is not an easy feat for most people. Both conventional and FHA loans also offer special mortgage programs that require lower than 20% down. Qualified borrowers can get approved for a conventional loan with as little as 3%-5% down, or 3.5% down for FHA.
Low down payment offerings create added risk for the lender. That's where the PMI mortgage insurance comes in, protecting the lender from borrower default. By balancing risk with mortgage insurance protection, lenders can confidently offer lower down payment options.
What is the cost of mortgage insurance?
On average, mortgage insurance costs between 0.5% and 1% of the mortgage amount per year. On a $300,000 loan, a borrower could expect to pay somewhere between $1,500 and $3,000 toward mortgage insurance premiums per year. That amount is split up into 12 monthly payments, on top of your mortgage payments.
The exact rate you pay depends on a few factors like your credit score, down payment amount, lender, and loan program. It's smart to shop and compare loan programs, especially when you have a small down payment.
PMI vs. MIP: What’s the difference?
There's a big difference between FHA's MIP and conventional PMI — the ability to remove it. One of the best things about conventional PMI is that you can ask your lender to remove it once you have 20% equity in your home.
All FHA loans have an up-front payment and a monthly mortgage insurance premium (MIP). Your MIP upfront payment will be equal to 1.75% of the total value of your loan and will be due at closing.
How to remove PMI and MIP
For conventional mortgages, you’ll need to wait until you have at least 20% equity to have your PMI removed by your lender. When it comes to FHA MIP, if a borrower puts down 10% or more, they may have the option of removing MIP after 11 years. However, if you put down less than 10%, the only way to remove it is to refinance to a conventional loan.
Explore all of your home loan options
It’s always smart to compare your options and find the best course of action for your unique situation. Whether you want to reduce mortgage payments by removing PMI or MIP, need a new mortgage, or you’re thinking about refinancing, be sure to explore every possibility.