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What Is Mortgage Insurance?

What you'll learn: What mortgage insurance covers, whether it’s required, and how to get rid of it

EXPECTED READ TIME: 5 MINUTES

May 19, 2023

What Homebuyers Need to Know About Mortgage Insurance

It can be challenging to put down the traditional 20 percent down payment on a home purchase. Fortunately, there are mortgage options available today that can allow you to get into a home for much less up front. Mortgage insurance helps make this possible. But what does mortgage insurance protect? Is it required? What’s private mortgage insurance vs. federal mortgage insurance? Read on and learn the answers to common questions.

What does mortgage insurance cover?

Insurance for mortgages was developed to assist in making homeownership possible for borrowers with less than a 20 percent down payment. Unlike car, life, or homeowners insurance, which protect your own assets, mortgage insurance protects the lender. It provides coverage to a lender if a borrower falls behind on payments and defaults on a loan.

Although mortgage insurance increases the cost of your loan, it allows you to qualify for a mortgage you may not have otherwise.

What is PMI and MIP?

The two most common types of mortgage insurance are private mortgage insurance (PMI) and mortgage insurance premium (MIP). Yours will depend on your loan type.

Private mortgage insurance (PMI)

PMI is the type of mortgage insurance used with conventional loans that have a down payment of less than 20 percent. It is typically paid as a monthly fee.

How much does PMI cost per month? Here’s a sample PMI range on a $500,000 home loan:

PMI Percentage	Monthly Cost	Annual Total
0.5%	$208	$2,500
1%	$417	$5,000

There are various ranges for PMI, and different factors are taken into account such as loan-to-value (LTV). It’s best to talk to your lender to understand how much your PMI might be. Some lenders offer PMI as an up-front payment instead of monthly payments over time.

MIP is required with every FHA loan, even if you place more than a 20 percent down payment. It includes an up-front mortgage insurance premium (UFMIP) as well as an annual premium that’s paid monthly.

	Up-Front Mortgage Insurance Premium (UFMIP)	FHA Monthly Insurance Premium (MIP)
How It’s Paid	Closing cost or rolled into the loan	Monthly installments
Amount	1.75% of loan amount	0.45% – 1.05% of the loan amount

For example: With a $500,000 home loan, you’d pay $8,750 up front and $188 to $438 per month.

Can you ever stop paying mortgage insurance?

Another important distinction between PMI and MIP is how it can be eliminated.

Eliminating PMI

To get rid of PMI, you must have at least 20 percent equity in your home. This can be achieved by making regular mortgage payments or paying down the principal more aggressively. It can also help if your home value has increased with a booming economy or by making upgrades. You’ll likely need a new appraisal to show the current value of your home exceeds 20 percent of what you owe.

According to U.S. Mortgage Insurers, people paying PMI will typically make monthly PMI payments for an average of five and a half years. Once you have equity that exceeds 20 percent of the original appraisal price, you can request to cancel PMI. It’s recommended to request a written copy of the cancellation to keep for your records.

Getting rid of MIP

With MIP, you pay the insurance premium for at least 11 years. For an FHA loan with a down payment of under 10 percent, MIP is paid for the loan's entire life. With a 10 percent down payment or more, the MIP is paid for the first 11 years.

Down Payment	MIP Length
Under 10%	Life of the Loan
10% and higher	11 Years

Another way to eliminate mortgage insurance – either PMI or MIP – is to refinance your mortgage completely. Of course, the same rules apply in your new mortgage. With a conventional loan, you'll need at least 20 percent equity or down payment. Refinancing can be a great option if interest rates have dropped and your home value has increased.

Although it’s an added cost to your loan, mortgage insurance may be the key to making the home of your dreams a reality. Talk to a lender about the best option for you.

Wondering how much home you can afford? Run your numbers in the free mortgage affordability calculator.

For more information about PenFed Mortgages:

PenFed Mortgage:

800-970-7766

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Disclosures

¹Except for holidays, rates are updated Monday through Friday at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on 30_YEAR_FIXED_CONFORMING_POINT discount point, which equals percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, conforming, fixed-rate loan. Loan amount of $400,000; loan-to-value ratio of 75%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.

^*Prime Rate is RV Prime Rate % as of Boat Prime Effective Date . The APR for this Home Equity Line of Credit (HELOC) is based on prime plus a margin and can change monthly. Fixed Rate Advances will be amortized over the Fixed Rate Advance Term, with the payment consisting of principal and interest. Your Annual Percentage Rate for a Fixed Rate Advance will be calculated by adding your Prime Rate, your Margin, and the Additional Fixed Rate Lock-In Margin. Your Annual Percentage Rate for a Fixed Rate Advance shall not exceed 18% and shall be equal to or greater than 1020 ELOC OO CLTV 70 Rate % for primary residences and second homes.

Annual Fee: Notwithstanding the foregoing, an annual fee of $99 will be assessed on each account anniversary.
Home equity lines of credit (HELOC) are variable rate loans and the interest rate is subject to increase after consummation of the loan on monthly basis. Closing costs range between $500 and $8,500 for credit lines of $500,000. Contact a representative for additional details.

Appraisals: PenFed will attempt to establish value via an independent method. If that method is unsuccessful, or the value is not sufficient for the amount requested, an appraisal will be required regardless of CLTV. An appraisal is always required in the following circumstances:

For all loans with a loan amount greater than $400,000.

If an appraisal is required, it must be ordered by PenFed. You will be contacted for authorization and payment prior to ordering. Appraisal fees average $550 to $850 (some run higher).

Closing Cost Credit: PenFed will pay most closing costs associated with a home equity line of credit (HELOC), which includes credit report, flood certification, settlement/closing, property ownership and encumbrances search, recording, property search, and quick close. Member is responsible for any city, county, and/or state taxes if the subject property is located in FL, LA, MD, MN, NY, TN, or VA. If an appraisal is required, the member, who is responsible for the fee whether or not the loan closes, will pay the cost.

Interest may be tax deductible, consult a tax advisor for further information regarding the tax deductibility of interest and charges.

Fixed Rate Advance Lock-In You may lock in an Annual Percentage Rate for Advances during the Draw Period. During your Draw Period, you may choose to have three separate Fixed Rate Advances locked in at any one time, with a maximum of two new Fixed Rate Advances per calendar year. Each Fixed Rate Advance must equal or exceed Ten Thousand Dollars ($10,000.00) and you may not request a Fixed Rate Advance that would cause the amount you owe to exceed your Credit Limit. The only term option for your Fixed Rate Advance is 240 months (“Fixed Rate Advance Term”). However, the term of your Fixed Rate Advance cannot exceed your Repayment Period.

Fixed Rate Advances will be amortized over the Fixed Rate Advance Term with the payment consisting of principal and interest. Your Annual Percentage Rate for a Fixed Rate Advance will be calculated by adding your Prime Rate, your Margin and the Additional Fixed Rate Lock-In Margin. Your Annual Percentage Rate for a Fixed Rate Advance shall not exceed 18% and shall be equal to or greater than 1020 ELOC OO CLTV 70 Rate % for primary residences and second homes and 4.75% for investment properties.

Property Insurance: Property insurance is required.

Multiple PenFed Loans: Multiple PenFed Equity loans and HELOCs are available as long as the member and collateral qualify (except Texas). For Equity loans and HELOCs the total indebtedness cannot exceed $500,000 for all PenFed Equity and HELOCs combined.

PenFed does not lend on:

Mobile homes
Co-ops or time-shares
Properties that are currently listed on the market for sale
Commercial property or property used for commercial purposes, even if a residence is part of the property
Undeveloped property (land only)
Properties with more than 4 units

Properties that are currently under major construction/renovations: Property must be fully livable, with no safety issues. (Examples: no missing rails from stairs/decks, no open walls with wires showing, missing kitchen appliances/counters, missing bath fixtures or unfinished pool).

Additional limitations may apply

Home Equity Line of Credit:

This Account has a Draw Period of 10 years, followed by a repayment period of 20 years.
If only minimum payments are made during the draw period, the loan balance will not decrease.
In Texas, the maximum CLTV available is 80% on owner occupied properties. Additional restrictions apply in Texas, so please ask a representative for details.
In all other states, the maximum CLTV is 85% on owner occupied properties and second homes. Additional restrictions or requirements may apply based on application characteristics.
Property type of Condo has a maximum CLTV of 80%.
The maximum CLTV available is dependent on credit qualification.
Rates vary depending on owner occupancy and CLTV and other loan criteria.

Minimum Loan Amount Requirements in all States:

For an owner occupied property or second home the minimum loan amount is $25,000 and the maximum amount is $500,000 with a CLTV of 85% or less of the fair market value.

Other terms and conditions apply; call 844-918-4307 to speak with a representative for details. All rates and offers are subject to change without notice. To receive advertised product, you must become a member of PenFed.

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