Understanding private mortgage insurance
What is mortgage insurance?
Mortgage insurance is an added insurance that protects lenders from financial loss if a borrower is unable to make their payments. There are a few types of mortgage insurance, each with its own requirements.
Private mortgage insurance (PMI) explained
Private mortgage insurance (PMI), also known simply as mortgage insurance, is a monthly premium that lenders charge when you put less than 20% down on a conventional home loan. You may also be required to hold mortgage insurance when refinancing if you have less than 20% equity in the home.
Don’t confuse mortgage insurance with homeowners insurance , which protects you if your home or belongings get damaged.
Mortgage insurance premium (MIP) for FHA loans
An FHA loan can offer more lenient credit requirements than a conventional loan and a down payment as low as 3.5%. FHA loans come with a mortgage insurance premium (MIP) instead of PMI. Both MIP and PMI protect the lender in the event you default on your loan, but they operate differently. A MIP has two parts: a one-time upfront premium as part of the closing cost, plus an annual payment.
Mortgage protection insurance (MPI): Optional coverage
Mortgage protection insurance (MPI) is an optional policy that will pay off your mortgage when you die, so your loved ones won’t have to carry the burden of an unpaid home loan. MPI may not be necessary if you have a life insurance policy.
Mortgage insurance costs by loan type
PMI for conventional mortgages
So, how much is mortgage insurance? It depends. PMI isn’t a flat fee—it’s usually 0.2% to 2% of the original loan amount annually. Most of your mortgage insurance fees are part of your monthly mortgage payment.
Your financial stats influence how much a lender decides to charge you for PMI: The riskier your profile, the higher percentage you’ll likely have to pay. Let’s walk through some factors lenders will consider.
- Down payment: Even if you can’t afford 20%, a higher down payment could shave down your PMI costs.
- Credit score: Stronger credit shows you’re good at managing debts, which could get you a lower PMI rate.
- Mortgage amount: Larger loans are saddled with higher PMI costs since the lender is taking on more risk.
- Mortgage type: Adjustable-rate loans are riskier for lenders than fixed-rate loans, so they generally come with higher PMI costs.
MIP for FHA loans
If you have an FHA loan, MIP comes in two forms: the upfront premium and the annual payment. The upfront premium is a one-time payment of 1.75% of your total loan. Usually this is paid upfront, but it can also be tacked onto your loan balance.
Your annual MIP will generally be 0.45% to 1.05% of your loan balance, divided up over your monthly payments. If your down payment is less than 10%, you’ll be stuck with the annual premium for the entire loan term. You usually can’t cancel MIP unless you refinance to a different type of loan.
VA funding fees
If you’re a veteran, an active service member, or a surviving spouse, a VA loan might be a no-down-payment option. Instead of PMI, you’ll owe a one-time funding fee, which is a small percentage of the total loan. Even though a down payment isn’t required, you may want to bring some cash to the table: The higher your down payment, the lower your funding fee will be.
Strategies to avoid private mortgage insurance
Making a 20% down payment
Putting down 20% means you don’t need to pay for mortgage insurance. Saving up 20% of a home’s purchase price is no easy feat, so it’s important to weigh the pros and cons: Do you want to get into a home now and start building equity, or would you rather keep saving to avoid the cost of mortgage insurance? If home prices are surging, mortgage insurance might be cheaper than waiting to buy.
Exploring government-backed loans
Take a closer look at conventional loan alternatives like FHA and VA loans, which can help make homeownership more affordable. See if you qualify for one of these government-backed loans so you can avoid paying PMI.
Citi offers conventional and government-backed home loans to help you find a mortgage that fits your down payment, credit profile and long-term goals.
Considering lender-paid mortgage insurance (LPMI)
You can build the cost of your mortgage insurance into your mortgage rate with lender-paid mortgage insurance. You won’t be charged a monthly PMI payment, but you will pay a higher rate for the life of your loan. Your credit score and down payment are key components in determining the increase in your rate, so you’d need to do the math to determine the more affordable option: paying mortgage insurance or paying the higher rate.
How to remove mortgage insurance
Automatic cancellation at 22% equity
Your lender is legally required to cancel PMI once you reach 22% in home equity, or one month after your loan’s midpoint (15 years into a 30-year loan, for example) as long as you are current on your payments. This doesn’t require action on your part, but there are more proactive ways to save.
Requesting cancellation at 20% equity
Mark your calendar for the day you hit 20% equity in your home. That’s when you can write to your lender or loan servicer and request that mortgage insurance be taken off your bill. You’ll need to be current on your payments and have a healthy payment history to qualify for PMI cancellation.
Refinancing to eliminate MIP
If you have an FHA loan and want to avoid mortgage insurance premiums, you may want to refinance to a different loan type. You can test the refinance waters and run through different rate and term scenarios using our Refinance Calculator. Keep in mind that when you refinance, you’ll need to pay closing costs, which can be between 2–6% of the loan amount.
Cancelling PMI through home appreciation
If your home has appreciated in value due to market conditions or big renovations, you might have more home equity than you think. You can request a new appraisal of your home from your lender. They’ll compare your remaining loan balance to the home’s appraised value to determine how much equity you have. Depending on how long you’ve been in the home, you may need to reach 25% estimated equity to cancel PMI.
Comparing mortgage insurance options
PMI vs. MIP: Key differences
| Private mortgage insurance (PMI) | Mortgage insurance premium (MIP) |
|---|---|
| For conventional loans | For FHA loans only |
| Only required with down payment of less than 20% | Required for all FHA loans regardless of down payment size |
| Monthly payments | Upfront premium and annual payment |
| Can be cancelled at request once 20% equity is reached | Can’t be cancelled if you put less than 10% down |
| Cost varies based on multiple factors | Cost is more standardized and less influenced by borrower’s financials |
| Lower initial loan-related costs compared to MIP’s upfront premium | Qualifying is easier for borrowers with lower credit scores and smaller down payments |
Pros and cons of PMI and MIP
Private mortgage insurance for conventional loans
| Pros of PMI | Cons of PMI |
|---|---|
| Allows for down payment of less than 20% | Increases monthly mortgage payment |
| Helps first-timer buyers and those with limited savings qualify for a mortgage | Protects only the lender, not the buyer |
| Allows buyers to purchase now and build equity instead of waiting to save | Adds to long-term loan costs without building equity directly |
| Cancelled automatically once owner reaches 22% equity | Depending on lender, requesting PMI removal can be cumbersome |
Mortgage insurance premium for FHA loans
| Pros of MIP | Cons of MIP |
|---|---|
| Allows for down payment as little as 3.5% and lower credit scores | Mandatory for FHA loans regardless of down payment size |
| Helps first-time borrowers and those with lower income | Required for entire loan term if down payment is less than 10% |
| May be refinanced to a conventional loan to remove MIP | Upfront premium plus annual fee add to total cost of loan |
