What is mortgage insurance ? Mortgage insurance is a cost that may be required on certain home loans to help protect the lender or loan program if the borrower stops making mortgage payments.
The simple answer:
Mortgage insurance lowers the lender’s risk, which may help eligible borrowers qualify for a home loan with a lower down payment. However, mortgage insurance increases the cost of the loan and usually protects the lender or program, not the borrower. It may be paid monthly, upfront at closing, or both, depending on the loan type.
The Consumer Financial Protection Bureau explains that mortgage insurance lowers the risk to the lender of making a loan, which may help a borrower qualify for a loan they might not otherwise be able to get. CFPB also notes that mortgage insurance increases the cost of the loan and may be included in the monthly payment, closing costs, or both.
Important note: This article is for informational purposes only and is not a commitment to lend. Mortgage insurance requirements, PMI, FHA mortgage insurance premium, USDA guarantee fees, VA funding fee, loan approval, down payment options, mortgage insurance cost, payment estimates, rates, APR, closing costs, cash to close, escrow, property eligibility, and mortgage insurance cancellation depend on borrower qualifications, credit profile, down payment, loan-to-value ratio, loan program, property details, lender guidelines, underwriting, investor requirements, servicer rules, and current program requirements.
Key Takeaways Mortgage insurance may help eligible borrowers qualify for a mortgage with a lower down payment, but it increases the cost of the loan. Mortgage insurance usually protects the lender or loan program, not the borrower. CFPB explains that mortgage insurance lowers lender risk and increases loan cost. Private mortgage insurance, often called PMI, may be required on a conventional loan when the borrower makes a down payment of less than 20%. FHA loans use mortgage insurance premiums, often called MIP, instead of PMI. HUD says most FHA programs collect an upfront mortgage insurance premium at closing and an annual mortgage insurance premium in monthly installments. USDA loans generally use guarantee fees rather than PMI. USDA publishes fee structures for its guaranteed loan programs, and the applicable upfront and annual fees can differ by purchase or refinance transaction. VA loans do not have monthly mortgage insurance, but many borrowers pay a one-time VA funding fee unless exempt. VA says the funding fee helps lower the cost of the program because VA loans do not require down payments or monthly mortgage insurance. Mortgage insurance is not the same as homeowners insurance. Homeowners insurance helps protect the property; mortgage insurance helps protect the lender or loan program. Conventional PMI may be removable later if requirements are met. CFPB says borrowers may request PMI cancellation when the principal balance is scheduled to reach 80% of the original home value, and automatic cancellation generally applies at 78% if the borrower is current. What Is Mortgage Loan Insurance? Mortgage loan insurance is another way to describe mortgage insurance connected to a home loan.
You may hear people use several phrases:
Mortgage insurance Mortgage loan insurance Mortgage insurance on a home loan Private mortgage insurance PMI FHA mortgage insurance premium Mortgage insurance premium USDA guarantee fee VA funding fee These terms are related, but they are not always the same.
The exact cost and rules depend on the loan type.
Loan Type
Common Mortgage Insurance or Program Cost
Conventional loan Private mortgage insurance, if required FHA loan Upfront and annual mortgage insurance premium USDA loan Upfront and annual guarantee fee VA loan VA funding fee for many borrowers; no monthly mortgage insurance Jumbo loan Depends on lender and loan structure Non-QM loan Depends on lender and investor guidelines
The main idea is simple:
Mortgage insurance helps reduce lender or program risk when the borrower has a smaller down payment or uses a loan program that requires insurance or guarantee fees.
What Is Mortgage Insurance on a Home Loan? Mortgage insurance on a home loan is a cost tied to certain mortgage programs.
It may be required when:
The down payment is small. The loan-to-value ratio is high. The loan is an FHA loan. The loan is a USDA loan. The borrower uses a conventional loan with less than 20% down. The loan program requires a mortgage insurance premium, guarantee fee, or funding fee. Mortgage insurance can make homeownership more accessible for some buyers because it may allow lower down payment options.
But it is still a cost.
That means buyers should compare:
Monthly payment Closing costs Down payment Mortgage insurance Cash to close Long-term cost Loan program fit PMI cancellation or removal options, if applicable A lower down payment may help you buy sooner, but the full payment must still fit your budget.
How Does Mortgage Insurance Work? How does mortgage insurance work? Mortgage insurance reduces the risk to the lender or loan program if the borrower defaults.
Here is the basic process:
You apply for a mortgage. The lender reviews your credit, income, assets, debts, property, and down payment. If the loan program requires mortgage insurance, the cost is added to the loan structure. You may pay mortgage insurance monthly, upfront, or both. If you stop making payments and the loan goes into default, mortgage insurance may help cover part of the lender’s or program’s loss. For conventional PMI, the insurance may be removable later if cancellation requirements are met. Mortgage insurance does not mean the borrower is protected from missed payments.
It does not pay your mortgage for you.
It does not protect your credit score.
It does not stop foreclosure.
It protects the lender or loan program.
Mortgage Insurance vs Homeowners Insurance Mortgage insurance and homeowners insurance are not the same.
Insurance Type
Who It Usually Protects
What It Covers
Mortgage insurance Lender or loan program Helps reduce risk if borrower defaults Homeowners insurance Homeowner and lender’s interest in property Covered damage or loss to the home Flood insurance Homeowner and lender’s interest in flood-risk property Covered flood damage Mortgage protection insurance Borrower’s family or lender depending on policy Optional insurance that may help with mortgage payoff or payments under policy terms
This distinction matters because many buyers hear “insurance” and assume they are personally protected.
Mortgage insurance is not a substitute for homeowners insurance, disability insurance, life insurance, emergency savings, or a strong household budget.
PMI: Private Mortgage Insurance on Conventional Loans PMI stands for private mortgage insurance.
PMI may be required on a conventional loan when the borrower makes a down payment of less than 20%.
CFPB defines PMI as a type of mortgage insurance a borrower may be required to buy when taking out a conventional loan with less than 20% down.
When PMI May Apply Conventional Loan Scenario
PMI Likely?
3% down Usually yes 5% down Usually yes 10% down Usually yes 15% down Usually yes 20% down Usually no, if program guidelines are met
PMI can be paid in several ways:
Monthly borrower-paid PMI Upfront PMI Split-premium PMI Lender-paid PMI Single-premium PMI CFPB says most private mortgage insurance is paid monthly, with little or no initial payment required at closing.
Why PMI Can Be Useful PMI may help eligible borrowers buy a home without waiting until they have 20% down.
This can be especially helpful for buyers who have stable income and can afford the monthly payment, but do not want to delay homeownership for years while saving a larger down payment.
Why PMI Needs Careful Review PMI increases the total payment.
It can affect:
Monthly affordability Debt-to-income ratio Purchase price range Cash flow after closing Long-term cost The right question is not only “Can I avoid PMI?”
The better question is:
Which loan option gives me the right balance of approval strength, monthly payment, cash to close, and long-term cost?
Buyers comparing PMI with other structures can also explore no PMI mortgage programs to understand when avoiding monthly PMI may or may not improve the full loan.
FHA Mortgage Insurance Premium FHA loans do not use PMI.
Instead, FHA loans use FHA mortgage insurance premium, often called MIP.
HUD says that in most FHA programs, an upfront mortgage insurance premium is collected at loan closing and an annual mortgage insurance premium is collected in monthly installments.
FHA MIP May Include FHA Mortgage Insurance Cost
How It Works
Upfront Mortgage Insurance Premium Usually collected at closing or financed into the loan, depending on program rules Annual Mortgage Insurance Premium Usually paid in monthly installments
FHA loans may be useful for borrowers who need more flexible credit or underwriting options.
But FHA mortgage insurance can affect the monthly payment and long-term cost.
That is why many buyers compare FHA with conventional loans that include PMI.
FHA MIP vs Conventional PMI Feature
FHA MIP
Conventional PMI
Loan type FHA loan Conventional loan Insurance provider/program FHA program Private mortgage insurer Often required? Generally required on FHA loans Usually required with less than 20% down Upfront cost Often yes Depends on PMI structure Monthly cost Often yes Often yes Removal rules FHA rules apply PMI may be cancellable if requirements are met Best fit May help borrowers needing FHA flexibility May fit borrowers who qualify for conventional financing
Neither option is automatically better.
The better fit depends on your credit, down payment, income, debt-to-income ratio, property, and total payment.
USDA Mortgage Insurance and Guarantee Fees USDA loans do not use PMI in the same way conventional loans do.
USDA guaranteed loans generally use guarantee fees.
USDA’s own training materials state that applicable upfront guarantee fees and annual fees may differ for purchase and refinance transactions, and that USDA publishes fiscal year notices to announce fee structures.
USDA Costs May Include USDA Cost
How It Usually Works
Upfront guarantee fee May be paid at closing or financed, depending on program rules Annual fee Often paid monthly as part of the mortgage payment
USDA loans may help eligible low- to moderate-income borrowers buy homes in eligible rural areas.
But USDA eligibility depends on property location, household income, credit, occupancy, and program rules.
USDA should be compared with FHA, conventional, VA, and other available loan options when applicable.
VA Loans and the Funding Fee VA loans do not have monthly mortgage insurance.
However, many VA borrowers pay a VA funding fee unless they are exempt.
VA says the funding fee is a one-time payment paid on a VA-backed or VA direct home loan. VA also says the fee helps lower the cost of the loan for U.S. taxpayers because the VA home loan program does not require down payments or monthly mortgage insurance.
VA Funding Fee Basics VA Item
What It Means
Monthly PMI Not required on VA loans Funding fee One-time fee for many VA borrowers Down payment Often not required for eligible borrowers, subject to program rules Exemptions Some Veterans, service members, or survivors may be exempt Payment method May be paid at closing or financed, depending on eligibility and rules
VA loans can be powerful for eligible borrowers.
But the funding fee, closing costs, entitlement, property eligibility, and lender requirements should still be reviewed carefully.
Mortgage Insurance by Loan Type Here is a simple comparison:
Loan Type
Mortgage Insurance or Program Fee
Paid Monthly?
Paid Upfront?
Can It Be Removed?
Conventional PMI, if required Often yes Sometimes May be cancellable if requirements are met FHA MIP Often yes Often yes FHA rules apply USDA Guarantee fee Often yes Often yes USDA rules apply VA Funding fee No monthly PMI Often one-time fee Not a monthly MI item Jumbo Depends on lender Depends Depends Depends on lender Non-QM Depends on investor Depends Depends Depends on loan structure
This table is a starting point.
Your actual loan estimate and lender comparison will show the real numbers for your scenario.
New buyers can compare first time home buyer home loan programs to see how Conventional, FHA, VA, USDA, and low down payment options handle mortgage insurance or program fees..
How Much Does Mortgage Insurance Cost? Mortgage insurance costs vary.
There is no single amount that applies to every borrower.
The cost may depend on:
Loan type Down payment Loan-to-value ratio Credit score Loan amount Property type Occupancy Loan term Debt-to-income ratio Mortgage insurer Lender or investor guidelines Whether the insurance is monthly, upfront, financed, or lender-paid CFPB says private mortgage insurance rates vary by down payment amount and credit score.
Buyers can also review how to calculate their mortgage payment so mortgage insurance is considered alongside principal, interest, taxes, insurance, and HOA dues.
What Can Increase or Decrease Mortgage Insurance Cost? Factor
Why It Matters
Down payment More down may reduce mortgage insurance cost Credit score Stronger credit may improve PMI pricing on conventional loans Loan type FHA, conventional, USDA, and VA structures differ Loan-to-value ratio Higher LTV usually means more risk Property type Condos, 2–4 units, or investment properties may differ Occupancy Primary residence may differ from second home or investment Loan term Some programs price differently by term Program rules Agency and investor guidelines change the structure
A Loan Estimate helps you compare mortgage insurance in context with the full loan offer.
Is Mortgage Insurance Included in the Monthly Payment? Sometimes, yes.
CFPB says mortgage insurance may be included in the total monthly payment, closing costs, or both.
Your payment may include:
Principal Interest Property taxes Homeowners insurance Mortgage insurance Flood insurance, if required HOA dues, often paid separately but counted for qualification Mortgage insurance may show in:
Projected Payments section of the Loan Estimate Estimated Taxes, Insurance & Assessments Closing cost details Prepaid costs Cash to close Monthly mortgage statement Ask your loan advisor to show where mortgage insurance appears in the payment and cost breakdown.
Can Mortgage Insurance Be Removed? It depends on the loan type.
Conventional PMI Conventional PMI may be removable if requirements are met.
CFPB says borrowers can ask the servicer to cancel PMI when the principal balance is scheduled to fall to 80% of the original home value. CFPB also says PMI must be automatically canceled when the balance is scheduled to reach 78% of the original value, if the borrower is current.
FHA MIP FHA mortgage insurance follows FHA rules.
Depending on the loan terms, down payment, and case details, FHA MIP may last for a set period or longer. Borrowers who want to remove FHA mortgage insurance often compare refinancing into a conventional loan if they qualify.
Homeowners can also review our guide on how much equity do you need to remove FHA MIP before assuming FHA mortgage insurance can be removed by equity alone.
USDA Fees USDA guarantee fees follow USDA program rules.
The annual fee is not the same as conventional PMI cancellation.
VA Funding Fee The VA funding fee is not monthly mortgage insurance.
If it applies, it is a one-time fee that may be paid at closing or financed, depending on program rules.
For a VA-specific breakdown, review Does a VA Loan Have PMI? to understand how the VA funding fee differs from monthly PMI and FHA mortgage insurance.
How to Compare Mortgage Insurance Options When comparing loan options, look beyond the interest rate.
Compare:
Item
Why It Matters
Interest rate Affects principal and interest APR Helps compare broader cost of credit Monthly mortgage insurance Affects payment Upfront mortgage insurance or fee Affects cash to close or loan amount Down payment Affects loan-to-value and insurance cost Closing costs Affects upfront cash Cash to close Shows how much you need at settlement PMI cancellation Affects long-term cost FHA MIP duration Affects long-term cost USDA guarantee fee Affects monthly and upfront cost VA funding fee Affects financed amount or cash to close Total monthly payment Shows real affordability Long-term plan Selling or refinancing timeline may matter
A loan with a lower rate may not always be the better option if mortgage insurance, fees, or cash-to-close requirements are higher.
Mortgage Insurance Example Hypothetical example only: This example is for educational purposes only and is not a quote, approval, payment estimate, advertisement, or commitment to lend. Actual mortgage insurance, rates, APR, fees, payments, closing costs, and loan terms depend on borrower qualifications, property details, loan program, lender guidelines, underwriting, and market conditions.
A buyer wants to purchase a home with less than 20% down.
The buyer may compare:
Loan Option
Mortgage Insurance or Program Cost
Conventional loan PMI may be required FHA loan FHA MIP may be required USDA loan USDA guarantee fees may apply VA loan No monthly PMI, but VA funding fee may apply for many borrowers Higher down payment conventional PMI may be reduced or avoided if program guidelines are met
The buyer should not choose based only on the down payment.
A smart comparison should include monthly payment, upfront cost, cash to close, mortgage insurance, cancellation rules, and long-term plans.
What We See in Real Buyer Reviews At Loan Factory, many buyers ask whether mortgage insurance is “bad.”
The better answer is more practical:
Mortgage insurance is a cost. Sometimes it helps a buyer purchase sooner with less down. Sometimes another loan structure may be better. The right choice depends on the full comparison.
Common situations we see include:
A buyer wants to avoid PMI but does not realize waiting for 20% down may take years. A buyer compares FHA and conventional and finds that one has a better total monthly payment. A buyer qualifies for VA and learns there is no monthly mortgage insurance, but a funding fee may apply. A buyer looks at USDA because the property may be in an eligible rural area, then compares guarantee fees with other options. A buyer chooses a conventional loan with PMI because PMI may be cancellable later. A buyer focuses only on the interest rate and forgets to compare mortgage insurance and cash to close. The best mortgage decision is usually not based on one number.
It is based on the full structure.
Mortgage Insurance Checklist Before You Choose a Loan Use this checklist before deciding:
Question
Why It Matters
Is mortgage insurance required? Confirms whether the cost applies What type of mortgage insurance is it? PMI, FHA MIP, USDA fee, or other structure Is it monthly, upfront, or both? Affects payment and cash to close Can it be financed? May affect loan amount and total cost Can it be removed later? Important for long-term planning What is the total monthly payment? Shows affordability What is the cash to close? Shows upfront cost How does this compare with FHA? FHA may fit some borrowers better How does this compare with conventional? Conventional PMI may be cancellable Are VA or USDA options available? These may change the cost structure How long do you plan to keep the home? Affects the value of upfront vs monthly costs What does the Loan Estimate show? Helps compare offers clearly
A small down payment can be helpful, but it should be paired with a full cost comparison.
Common Mortgage Insurance Mistakes to Avoid Mistake 1: Thinking Mortgage Insurance Protects the Borrower Mortgage insurance generally protects the lender or loan program, not the borrower.
Mistake 2: Confusing PMI With FHA MIP PMI applies to conventional loans.
FHA loans use mortgage insurance premiums.
Mistake 3: Assuming 20% Down Is Always Required Many buyers can qualify with less than 20% down, depending on program requirements. Mortgage insurance may help make that possible.
Buyers can review the minimum down payment for first-time home buyers to compare 0%, 3%, 3.5%, and other down payment options by loan program.
Mistake 4: Ignoring the Total Monthly Payment Mortgage insurance can affect affordability.
Always compare principal, interest, taxes, insurance, mortgage insurance, and HOA dues if applicable.
Mistake 5: Believing “No PMI” Means No Cost A “no PMI” structure may involve a higher interest rate, larger down payment, second mortgage, or other tradeoff.
Mistake 6: Not Asking About PMI Cancellation If you are using conventional PMI, ask when you may request cancellation and what your servicer will require.
Mistake 7: Comparing Loan Options Without a Loan Estimate A Loan Estimate helps show payment, closing costs, estimated taxes and insurance, and other loan details. CFPB describes the Loan Estimate as a disclosure that provides important information about the mortgage you requested.
How Loan Factory Helps Buyers Compare Mortgage Insurance At Loan Factory, we help buyers compare mortgage options side by side so they can understand how mortgage insurance affects monthly payment, cash to close, and long-term cost.
Loan Factory’s Why Us page highlights access to 240+ lenders, transparent pricing, and expert support nationwide.
What Loan Factory Offers Homebuyers Conventional loan comparison with PMI review FHA loan comparison with MIP review VA loan review for eligible borrowers USDA loan review for eligible borrowers and properties Jumbo, Non-QM, and other loan option comparisons Side-by-side review of rate, APR, mortgage insurance, fees, credits, and cash to close Help comparing low down payment options such as HomeReady and Home Possible, depending on eligibility Local loan advisor support to explain Loan Estimates, PMI, FHA MIP, USDA fees, VA funding fee, escrow, and monthly payment TERA technology platform to support pricing, loan comparison, document flow, and loan review No application fee to start reviewing mortgage options Loan Factory does not guarantee loan approval, lower payment, lower rate, mortgage insurance cancellation, property eligibility, appraisal results, or that one loan program will be best for every borrower.
But we can help you compare available mortgage paths before you apply, make an offer, or choose a loan program.
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Author Box Written by: Loan Factory Mortgage Education Team
Loan Factory is a technology-powered mortgage platform helping borrowers compare mortgage options through a broad wholesale lender network. Our mortgage education content is designed to help buyers understand mortgage insurance, PMI, FHA MIP, USDA guarantee fees, VA funding fees, down payment options, monthly payments, closing costs, and the home loan process before applying.
Compliance Disclaimer This content is for informational and educational purposes only and is not a commitment to lend, not tax advice, not insurance advice, not legal advice, and not financial advice. Mortgage insurance requirements, PMI, FHA mortgage insurance premium, USDA guarantee fees, VA funding fee, mortgage insurance cancellation, loan approval, Conventional, FHA, VA, USDA, Jumbo, Non-QM, or other loan eligibility, rates, APR, fees, payment estimates, down payment, seller credits, lender credits, closing costs, cash to close, escrow, property taxes, homeowners insurance, property eligibility, appraisal results, and closing timelines depend on borrower qualifications, credit profile, income, debts, assets, down payment, loan-to-value ratio, property details, lender guidelines, underwriting, mortgage servicer rules, investor requirements, and current program rules. Not all applicants, homes, properties, or programs will qualify. Terms may change without notice.
Loan Factory is not affiliated with or acting on behalf of HUD, FHA, VA, USDA, Fannie Mae, Freddie Mac, FHFA, CFPB, FTC, any mortgage insurer, insurance company, or government agency. FHA, VA, USDA, Conventional, Jumbo, conforming, non-conforming, refinance, cash-out refinance, home equity, and other loan programs are offered through participating lender partners and approved program providers, subject to eligibility and underwriting approval.
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FAQ: What Is Mortgage Insurance? 
