Understanding Mortgage Insurance

Q: How much does PMI cost per month?

Most borrowers pay between 0.5% and 1.5% of the loan amount per year, split into twelve monthly payments. On a $300,000 loan, that is roughly $125 to $375 a month. Your exact rate depends on credit score, loan-to-value ratio, loan term and occupancy. A 760 credit score with 10% down can cost less than half what a 640 score with 3% down pays.

Q: When does PMI go away?

You can request cancellation once the balance reaches 80% of the original value, and the servicer must terminate it automatically at 78%, provided your payments are current. Some servicers will also cancel based on a new appraisal showing appreciation, typically after two years. FHA mortgage insurance follows different rules and usually requires a refinance to remove.

Q: Does mortgage insurance protect me if I lose my job?

No. Mortgage insurance reimburses the lender if you default and the foreclosure sale does not cover the balance. It provides no benefit to you, your family or your home. Mortgage protection life insurance and disability policies are separate products that do pay the borrower or their heirs, and they are purchased independently of the loan.

Q: Is it better to pay PMI or wait for a 20% down payment?

Often it is better to buy sooner and pay PMI. Waiting three years to save another 10% down means paying rent and competing against home price appreciation the whole time. Compare the total PMI you would pay before cancellation against expected appreciation and rent. A broker can also price lender-paid PMI and piggyback structures as alternatives.

Written by Samantha SheltonNMLS 1647301Updated September 2026

First-time buyer moving into a starter home financed with a low down payment and mortgage insurance

Mortgage insurance protects your lender, not you, and it is generally required whenever you put down less than 20% of a home’s purchase price. On a conventional loan that coverage is private mortgage insurance, and federal law requires your servicer to terminate it automatically once your balance is scheduled to reach 78% of the home’s original value.

Government-backed programs price the same risk differently. An FHA loan charges a 1.75% upfront premium plus an annual premium that runs the full mortgage term whenever you start above 90% loan-to-value. USDA charges an upfront guarantee fee and an annual fee. VA charges a one-time funding fee and no monthly mortgage insurance at all.

Learn what mortgage insurance actually covers, what each loan program charges for it, how the premium lands in your monthly payment, and exactly when you are allowed to stop paying it. If you’re earlier in the process, start with our Mortgage Basics guide.

Key takeaways:

Mortgage insurance is the price of a low down payment: It covers the lender’s loss if you default, which is why conventional loans go up to 97% of value and FHA loans go down to 3.5% down.
Conventional coverage ends, FHA coverage usually doesn’t: Your servicer must terminate private mortgage insurance at 78% of original value, while FHA charges its annual premium for the full mortgage term any time you start above 90% loan-to-value.
Your file sets the price, not the house: FHA’s annual premium is published at 0.50% – 0.55% for most 30-year loans, but private coverage is priced off credit score and loan-to-value, so two borrowers on the same $300,000 loan can pay very different premiums.

What is mortgage insurance?

Mortgage insurance is a policy that reimburses your lender if you default and the foreclosure sale doesn’t cover what you still owe. It pays the lender. It does not pay you, your family, or repair your home. The Consumer Financial Protection Bureau states the point without hedging: mortgage insurance protects the lender, not you, if you fall behind on your payments.

The trigger is your down payment. Borrowers putting down less than 20% of the purchase price typically have to pay for mortgage insurance, and the same requirement usually applies to a conventional refinance when your equity is under 20%. Every major loan program has a version of it, under a different name and with different rules. For the plain-English federal explainer, see the CFPB’s explanation of private mortgage insurance.

Why do lenders require mortgage insurance?

Because it is the mechanism that lets a lender say yes to a small down payment. A borrower with 3% down has almost no equity cushion, so if values dip and the loan goes bad, the lender’s loss is close to the full shortfall. Insurance moves part of that loss to a third party, and the loan becomes fundable.

That trade is what puts low-down-payment lending on the table at all. Fannie Mae buys conventional loans in the 95.01% to 97% loan-to-value band, meaning a 3% down payment, and HUD says an FHA down payment can be as low as 3.5% of the purchase price. Neither is possible without the insurance behind it. Our guide to low-down-payment mortgages covers the programs side by side.

One consequence worth planning for: the premium counts in the housing payment your lender uses to qualify you, and there is no fixed federal debt-to-income ceiling on a conventional loan. Fannie Mae’s maximum is 50% for files run through its automated underwriting system; manually underwritten loans start at 36% and reach 45% only when the credit score and reserve requirements in Fannie Mae’s Eligibility Matrix are met. A higher premium eats into that room.

What are the four kinds of mortgage insurance?

There are four, one per major loan program, and they differ most in whether you can ever get rid of them.

	Conventional PMI	FHA MIP¹	USDA guarantee fee	VA funding fee²
Upfront cost	Usually none. Most private coverage is paid monthly with little or no payment at closing.	1.75% of the base loan amount.	An upfront guarantee fee set by USDA, capped by rule at 3.5% of the principal obligation.	2.15% for a first-use purchase with less than 5% down, 1.5% at 5% down, 1.25% at 10% down.
Annual cost	Priced from the mortgage insurer’s rate card and billed monthly.	0.50% – 0.55% of the balance on most 30-year loans at or below the national conforming loan limit.	An annual fee set by USDA, capped by rule at 0.5% of the average annual scheduled unpaid principal balance.	None. VA loans carry no monthly mortgage insurance.
Can it be canceled?	Yes. On request at 80% of original value, automatically at 78%.	Only by refinancing if you started above 90% LTV. It drops after 11 years if you started at 90% or below.	No. The annual fee runs for the life of the loan.	Not applicable. The funding fee is a one-time charge.
Who it fits	Buyers with 3% to 19% down who expect to build equity.	Buyers who need flexible credit qualifying or the 3.5% down payment.	Buyers in USDA-eligible areas who meet the income limits.	Eligible veterans, service members and surviving spouses.

Two rows deserve a closer look. On FHA loans the duration column is the part borrowers miss: the split is at 90% loan-to-value at origination, not at 20% equity later. And VA is the outlier, because VA home loan programs, which require no monthly mortgage insurance, replace the recurring premium with a single funding fee that is waived entirely for veterans receiving VA compensation for a service-connected disability, among other groups. For the program-level view of FHA, start with HUD’s overview of FHA loan programs.

How much does mortgage insurance cost?

On a government loan the number is published; on a conventional loan it is quoted to your file. FHA’s annual premium is 0.50% of the balance for most 30-year loans and 0.55% once loan-to-value passes 95%, both for base loan amounts at or below the national conforming loan limit. Private coverage has no published table; mortgage insurers price each borrower separately.

Four inputs move a private premium the most:

Loan-to-value ratio: The less you put down, the more of the lender’s exposure has to be insured, and the higher your rate. It is the single biggest driver.
Credit score: Insurer rate cards step down sharply as scores rise. A strong score with 10% down can cost a fraction of what a thin score with 3% down pays on the same loan amount.
Loan term and occupancy: Shorter terms and primary residences price better than long terms, second homes and investment property.
Who pays the premium: Some lenders offer lender-paid coverage, where the cost sits inside your interest rate instead of on a separate line. That is a lender option, not a program rule, and the trade is permanent: with no borrower-paid premium to terminate, the only exit is a refinance.

The arithmetic is simple once you have a rate. On a $300,000 loan, an annual premium of 0.5% is $1,500 a year, or $125 a month. At 1.0% it is $3,000 a year, $250 a month. At 1.5% it is $4,500 a year, $375 a month.³ Same loan amount, three very different monthly bills, which is why the premium quote belongs in your lender comparison alongside the rate.

The tax treatment of the premium changed this year, so ignore older guidance. The itemized deduction for mortgage insurance premiums expired after 2021, IRS Publication 936 for 2025 returns still says it can no longer be claimed, but the One Big Beautiful Bill Act permanently restored it for tax years beginning after December 31, 2025. Premiums paid in 2026 are again treated as qualified residence interest if you itemize. The deduction shrinks by 10% for every $1,000 of adjusted gross income above $100,000 ($50,000 if you file separately) and reaches zero at $110,000, so many borrowers still budget the premium as a pure housing cost.⁴

How is mortgage insurance paid?

Three ways, and your loan program decides which are available. Most private coverage is paid monthly, added to your mortgage payment with little or no initial payment at closing. FHA splits it, with an upfront premium paid as part of closing costs and a monthly amount in your payment. USDA works the same way, upfront and monthly. VA collects a single funding fee, which most borrowers finance into the loan rather than pay in cash.

Some lenders also offer a single-premium option on conventional loans, where the cost is paid at closing or financed into the loan. That is a lender offering, not a program rule, and it pays off only if you keep the loan long enough to break even.

Whichever form you choose, your mortgage servicer collects it, and has to stop collecting it when the rules say so. If your loan also has an escrow account for taxes and homeowners insurance, the CFPB’s Regulation X at 12 CFR 1024.17 caps the cushion your servicer may hold at one-sixth of the estimated total annual payments from the account, about two months. Our payments, escrow and servicing hub walks through how the pieces of a monthly payment fit together.

When can you stop paying mortgage insurance?

On a conventional loan, three separate federal rules can end private mortgage insurance, and they are not interchangeable. The Homeowners Protection Act governs all three for single-family principal residences closed on or after July 29, 1999.

The three conventional termination rules

Cancellation on your request at 80%: You have the right to ask your servicer in writing to cancel on the date your principal balance is scheduled to fall to 80% of the home’s original value. You must have a good payment history and be current on your payments.
Automatic termination at 78%: Your servicer must terminate coverage on the date your balance is scheduled to reach 78% of original value, provided you are current that day. If you are not current, termination happens on the first day of the first month after you bring the loan current.
Final termination at the midpoint: If neither of the first two has happened, premiums cannot be charged beyond the first day of the month following the midpoint of your amortization period, year 15 of a 30-year loan, as long as you are current.

All three run off original value, generally the lower of your contract sales price or the appraised value when you bought. If you refinanced, it is the appraised value at the time of the refinance. Rising home prices do not move these dates, because the denominator never changes.

Canceling early based on today’s value

Appreciation can still get you out, just under a different rulebook. Fannie Mae’s Servicing Guide lets a borrower request termination based on the property’s current value: with two to five years since the note date, the loan-to-value ratio has to be 75% or less, and after more than five years it has to be 80% or less. You also need an acceptable payment record, meaning current at the request, no payment 30 or more days past due in the last 12 months and none 60 or more days past due in the last 24, plus a valuation based on an interior and exterior inspection.

Note what that is and isn’t. It is an investor policy your servicer follows, not a right Congress granted you, and standards differ by investor. Ask your servicer which rulebook your loan sits under before you pay for a valuation, and see what servicing with Align Lending looks like.

FHA, USDA and VA loans

FHA runs on duration, not on equity. If your loan-to-value at origination was above 90%, the annual premium lasts the full mortgage term, and paying the balance down does not end it. At 90% or below, it drops off after 11 years. Either way the practical exit is a refinance into a conventional loan once you have enough equity to avoid new coverage, and our guide to refinancing to remove mortgage insurance runs the break-even math. USDA’s annual fee runs for the life of the loan by rule. The VA funding fee is one-time, so there is nothing to cancel.

Mortgage insurance vs. homeowners insurance: which one protects you?

Homeowners insurance protects you. Mortgage insurance protects your lender. They arrive on the same monthly statement and are often escrowed together, which is why the two get confused constantly, and the confusion costs people money.

Homeowners insurance pays to repair or rebuild your home after a covered loss, replaces your belongings, and covers liability if someone is hurt on your property. You are the beneficiary. Mortgage insurance pays your lender when a defaulted loan sells for less than the balance. You pay, and you get nothing back.

One useful implication: the coverage that protects your household if your income stops is a different product entirely. Mortgage protection life and disability policies pay the borrower or their heirs, are bought separately from the loan, and are not required by any lender program. Don’t assume the premium already on your statement is doing that job.

How Align sets up your payment

Align places your loan with a wholesale lender, and that lender or its servicer collects your payments after closing. Before then, Samantha builds your escrow on your real tax bill, not the seller's.

The year after a Michigan home sells, its taxable value resets to half of the assessor's market value, so the seller's tax bill is not your tax bill. She quotes your number on the high side on purpose.

Get a homebuying budget review

Sources: Michigan Treasury, transfer of ownership and uncapping.

FAQ: Mortgage insurance

Here are answers to common questions about mortgage insurance.

How much does PMI cost per month?

It depends on the rate your mortgage insurer assigns to your file. Private coverage is quoted as an annual percentage of the loan balance and billed monthly, so the math is direct: on a $300,000 loan, 0.5% is $125 a month, 1.0% is $250 and 1.5% is $375. Credit score, loan-to-value, term and occupancy decide where you land. Our payments and escrow guide shows how it appears on your statement.

When does PMI go away?

On a conventional loan, at 78% of the home’s original value, when your servicer must terminate it automatically if you are current. You can also request cancellation at 80%, and a midpoint rule ends it at year 15 of a 30-year loan. FHA coverage follows duration rules instead, so if you started above 90% loan-to-value the usual exit is refinancing to remove mortgage insurance.

Does mortgage insurance protect me if I lose my job?

No. It reimburses the lender after a default, and it pays nothing to you, your family or your home. If income stops, the tool that actually helps is a hardship option from your servicer. Keep in mind that forbearance pauses or reduces payments without erasing what you owe, and the paused amount is repaid later through a lump sum, higher payments, or an extension of the loan.

Is it better to pay PMI or wait for a 20% down payment?

Often it is better to buy sooner and pay the premium. Saving another 10% down can take years of rent while prices move, and conventional coverage typically ends well before the loan does. Compare the total premium you would pay before termination against expected appreciation and rent. A broker can also price lender-paid coverage and low-down-payment programs as alternatives.

The bottom line on mortgage insurance

Mortgage insurance protects your lender, not you, and it is generally required when you put down less than 20%. On a conventional loan, federal law lets you request cancellation at 80% of the home’s original value and requires automatic termination at 78%, both conditioned on being current, with a backstop at the midpoint of your amortization schedule. FHA charges 1.75% upfront plus 0.50% – 0.55% a year, and that annual premium runs the full mortgage term whenever you start above 90% loan-to-value. USDA charges an upfront and an annual fee. VA charges a one-time funding fee and no monthly coverage at all.

If you’re ready to see which program leaves you with the smallest premium, talk to Align Lending, we’ll shop your scenario across our lender network and put the mortgage insurance cost of each option in front of you side by side. Call 248-506-5727 or start online today.

Footnotes:

1. Align Lending is not acting on behalf of or at the direction of FHA or HUD. FHA mortgage insurance premium rates and durations are set by HUD, published in FHA Mortgagee Letters and Handbook 4000.1, and are subject to change. Return to text.

2. Align Lending works with VA-approved lenders and is not endorsed or sponsored by the Dept. of Veterans Affairs or any government agency. VA funding fee rates and exemptions are set by VA and are subject to change. Return to text.

3. Example figures in this article are hypothetical and for educational purposes only; they do not constitute an advertisement of credit terms or a rate quote under federal or state lending laws. The premium rates shown are illustrations of the arithmetic, not quotes. Your actual mortgage insurance premium depends on your loan program, loan-to-value ratio, credit score, term, occupancy and the mortgage insurer’s rate card. Return to text.

4. This is general information, not tax advice. Tax treatment of mortgage insurance premiums has changed several times and can change again. Confirm the rule for your tax year and your circumstances with a qualified tax professional. Return to text.

Sources: mortgage insurance protects the lender rather than the borrower, the under-20% down payment trigger, and the monthly, upfront and combined payment methods by loan program, Consumer Financial Protection Bureau (Ask CFPB, “What is private mortgage insurance?” and “What is mortgage insurance and how does it work?”). Borrower-requested cancellation at 80% of original value with a good payment history, automatic termination at 78% when current, termination on the first day of the first month after the borrower becomes current, final termination at the midpoint of the amortization period, the definition of original value, and the July 29, 1999 applicability date, Homeowners Protection Act, 12 U.S.C. § 4902; CFPB, “When can I remove private mortgage insurance from my loan?” FHA upfront premium of 175 basis points (1.75%) of the base loan amount, annual premium of 50 and 55 basis points by loan-to-value for terms over 15 years, the duration split of 11 years at 90% LTV or below versus the mortgage term above 90%, and the base loan amount threshold tied to the national conforming loan limit, HUD Mortgagee Letter 2023-05 and FHA Single Family Housing Policy Handbook 4000.1, Appendix 1.0. FHA down payments as low as 3.5% of the purchase price, U.S. Department of Housing and Urban Development. VA purchase funding fee rates of 2.15%, 1.5% and 1.25% for first use effective April 7, 2023, the funding fee exemptions, and the absence of monthly mortgage insurance on VA loans, U.S. Department of Veterans Affairs. USDA upfront guarantee fee capped at 3.5% of the principal obligation and annual fee capped at 0.5% of the average annual scheduled unpaid principal balance for the life of the loan, 7 CFR § 3555.107(g) and (h). Escrow cushion of no more than one-sixth of estimated total annual payments, Regulation X, 12 CFR § 1024.17(c)(1)(ii). Conventional loans at 95.01% to 97% loan-to-value, Fannie Mae Selling Guide B5-6-01 and B7-1-02. Maximum debt-to-income ratio of 50% for loan casefiles underwritten through Desktop Underwriter, and 36% for manually underwritten loans with up to 45% permitted when credit score and reserve requirements in the Eligibility Matrix are met, Fannie Mae Selling Guide B3-6-02. Borrower-initiated mortgage insurance termination based on current value at 75% LTV with two to five years of seasoning and 80% LTV after five years, the acceptable payment record standard, and the interior and exterior property valuation requirement, Fannie Mae Servicing Guide B-8.1-04. Forbearance does not erase or decrease the amount owed and repayment options include a lump sum, increased monthly payments or an extension of the loan term, Consumer Financial Protection Bureau. Expiration of the itemized deduction for mortgage insurance premiums for 2021 through 2025 returns, IRS Publication 936 (for use in preparing 2025 returns); permanent restoration of qualified mortgage insurance premiums as qualified residence interest for taxable years beginning after December 31, 2025, One Big Beautiful Bill Act, Pub. L. 119-21, § 70108, amending 26 U.S.C. § 163(h)(3)(F); adjusted gross income phaseout of 10% per $1,000 above $100,000 ($50,000 for married filing separately), 26 U.S.C. § 163(h)(3)(E)(ii).

This article is for informational purposes only and is not intended to provide legal, financial, or tax advice. Mortgage insurance rates, program rules, agency fees and cancellation standards change and vary by loan program, investor and servicer; confirm your figures with your Loan Estimate, your loan documents and your servicer, and consult a qualified professional about your situation. Figures shown are illustrative, are not a rate quote or an offer of credit, and are subject to change. Align Lending is an independent Michigan mortgage broker, NMLS #2041154.