What Is Mortgage Insurance and When Do You Need It in the US?

Buying a home is one of the biggest financial decisions most people make in their lives. But for many, especially first-time buyers, coming up with a large down payment can be challenging. This is where mortgage insurance comes into play. It enables lenders to approve loans with smaller down payments, making homeownership more accessible—but it also adds to your monthly costs.

In the United States, mortgage insurance is a critical part of the home financing process for certain types of loans. Understanding what it is, how it works, and when it is required can help you make smarter decisions when buying or refinancing a home.

What Is Mortgage Insurance?

Mortgage insurance is a policy that protects the lender, not the borrower, in case the borrower defaults on the loan. If you stop making your mortgage payments and the lender has to foreclose, mortgage insurance helps cover the losses.

Mortgage insurance is commonly required when borrowers make a down payment of less than 20% of the home’s purchase price. By taking on more risk in lending to someone with a lower down payment, lenders use mortgage insurance to reduce their potential loss.

While mortgage insurance adds to the overall cost of homeownership, it allows buyers to enter the housing market sooner and with a smaller upfront investment.

Types of Mortgage Insurance in the US

Mortgage insurance in the United States can take several forms depending on the type of loan you have. The most common types are:

1. Private Mortgage Insurance (PMI)

PMI is used with conventional loans when the borrower puts down less than 20% of the home’s value. PMI is provided by private insurance companies and is arranged by your lender.

Key facts about PMI:

Required for conventional loans with less than 20% down payment
Can be paid monthly, upfront, or both
Typically costs between 0.3% and 1.5% of the loan amount annually
Can be canceled once you reach 20% equity in the home

2. FHA Mortgage Insurance

Loans insured by the Federal Housing Administration (FHA) require Mortgage Insurance Premiums (MIP). FHA loans are popular with first-time buyers due to their lenient credit requirements and low down payment options (as low as 3.5%).

FHA MIP includes:

Upfront Mortgage Insurance Premium (UFMIP): Typically 1.75% of the loan amount, paid at closing or rolled into the loan
Annual MIP: Paid monthly, ranges from 0.45% to 1.05% depending on loan terms

Unlike PMI, FHA mortgage insurance often cannot be removed unless you refinance into a conventional loan.

3. VA Loan Guarantee (No Mortgage Insurance)

If you are a qualified veteran, active-duty service member, or eligible surviving spouse, you may qualify for a VA loan through the Department of Veterans Affairs. These loans do not require mortgage insurance, even with zero down payment.

Instead of mortgage insurance, VA loans require a funding fee, which can be financed into the loan. This fee helps the VA maintain the loan program but still offers a better deal compared to PMI or FHA MIP.

4. USDA Guarantee Fees

USDA loans, for rural and eligible suburban homebuyers, also do not require traditional mortgage insurance. Instead, they include:

An upfront guarantee fee (typically 1% of the loan)
An annual fee (around 0.35%) paid monthly

Like VA and FHA loans, these are government-backed and designed to support low- to moderate-income buyers.

When Do You Need Mortgage Insurance?

In general, mortgage insurance is required when you:

Make a down payment less than 20% of the purchase price on a conventional loan
Use an FHA loan, which always requires insurance
Get a USDA loan, which has guarantee fees instead of mortgage insurance

You do not need mortgage insurance if:

You put 20% or more down on a conventional loan
You’re using a VA loan and meet eligibility requirements
You refinance into a conventional loan and have at least 20% equity

How Much Does Mortgage Insurance Cost?

The cost of mortgage insurance depends on several factors:

Your loan amount
The size of your down payment
Your credit score
Loan type and term

For PMI on conventional loans, expect to pay:

Between 0.3% and 1.5% annually of your original loan amount
Monthly payments vary, but could be $30–$70 per $100,000 borrowed

For FHA loans:

Upfront fee: 1.75% of the loan amount (can be rolled into your loan)
Annual MIP: Ranges from 0.45% to 1.05% depending on term, loan size, and down payment

Mortgage insurance can significantly affect your monthly payment, so it’s important to factor it into your total homebuying budget.

Can You Cancel Mortgage Insurance?

Yes, but it depends on the type of insurance and loan you have.

For PMI on Conventional Loans:

You can request cancellation once you reach 20% equity based on the original home value
Lenders are required to automatically cancel PMI when you reach 22% equity
You must be current on your payments

For FHA Loans:

If your loan was originated after June 2013 and your down payment was less than 10%, you’ll likely pay MIP for the life of the loan
If you put down 10% or more, MIP may drop after 11 years
To remove FHA mortgage insurance, many borrowers choose to refinance into a conventional loan

Is Mortgage Insurance Tax Deductible?

Mortgage insurance premiums were previously tax deductible for certain income levels. However, this provision has expired and may not be available for the 2025 tax year unless Congress renews it.

Always consult with a tax professional or CPA to get current and personalized advice.

Pros and Cons of Mortgage Insurance

Pros:

Enables buying a home with a smaller down payment
Helps first-time buyers or lower-income families qualify for loans
May allow access to better loan terms by reducing lender risk
Some policies are cancellable when you reach enough equity

Cons:

Adds to monthly housing costs
Increases the overall cost of the loan over time
FHA mortgage insurance may not be removable
Limited or no benefit to the borrower (protects lender)

Should You Avoid Mortgage Insurance?

Avoiding mortgage insurance often means putting down 20% or more, which isn’t always feasible for everyone. In some cases, it may make sense to accept mortgage insurance in exchange for:

Buying sooner rather than saving for years
Taking advantage of lower interest rates
Getting into a rising real estate market earlier

Some lenders offer “lender-paid mortgage insurance” (LPMI), where they pay the insurance but charge a higher interest rate. This option can be worth considering depending on your goals.

Mortgage insurance can feel like an added burden, but it plays a valuable role in making homeownership possible for millions of Americans. By understanding how it works, when it’s required, and how much it costs, you can make smarter choices when applying for a mortgage or refinancing.

If you’re planning to buy a home with less than 20% down, factor mortgage insurance into your monthly budget. And if you already have mortgage insurance, look for opportunities to cancel it once you’ve built enough equity.