What Is Mortgage Insurance and How Does It Work?

Mortgage insurance is an extra charge added to your home loan that protects the lender if you stop making payments, and it’s typically required whenever your down payment is less than 20% of the home’s price. So what is mortgage insurance and how does it work in practice? You pay it monthly as part of your mortgage payment, the cost depends on your credit and loan type, and on a conventional loan you can eventually cancel it once you’ve built enough equity. Government-backed loans from the FHA, USDA, and VA have their own versions with different rules — including some you can never cancel without refinancing.

Who Mortgage Insurance Actually Protects

The name is misleading. Mortgage insurance does not protect you, your family, or your home. It protects the lender against the risk that you’ll default on a loan where you had little equity to lose. Because you’re the higher-risk borrower in that scenario, you’re the one paying the premium.

On a conventional loan, this coverage is called private mortgage insurance, or PMI, and it’s issued by a private insurer the lender chooses. On government-backed loans, the federal agency guaranteeing the loan charges its own version of the same thing, structured as premiums or fees rather than a separate insurance policy.

When PMI Is Required and What It Costs

PMI becomes mandatory on a conventional loan when your down payment is less than 20%, meaning your loan-to-value ratio is above 80%.¹ LTV is just the loan amount divided by the home’s appraised value. A $285,000 loan on a $300,000 home gives you a 95% LTV, which is well into PMI territory.

Annual premiums generally run between 0.3% and 1.5% of the outstanding loan balance.¹ On a $350,000 loan, that works out to roughly $88 to $438 per month. Three factors drive where you land in that range:

Credit score. This is the biggest lever. Borrowers above 760 pay the lowest rates; those near the 620 conventional minimum can pay three or four times more.
Down payment size. More equity at closing means a smaller premium.
Loan term. A 30-year mortgage carries more risk for the insurer than a 15-year term, and premiums reflect that.

Fannie Mae requires a minimum credit score of 620 for fixed-rate conventional loans and 640 for adjustable-rate loans.² Below those floors you won’t qualify for a conventional loan at all, which is why borrowers with marginal credit often end up in FHA loans instead.

How Mortgage Insurance Works on FHA, USDA, and VA Loans

Each government loan program handles the lender-protection charge differently. The rules matter because they affect both your monthly cost and whether you can ever get rid of the premium.

FHA Mortgage Insurance Premiums

FHA loans carry two layers. The upfront mortgage insurance premium is 1.75% of the base loan amount, paid at closing or rolled into the loan. The annual premium is split into monthly installments. For a typical 30-year FHA loan at or below $625,500, the annual rate is 0.80% if your LTV is 95% or below, and 0.85% if your LTV is higher.³

How long you pay the annual premium depends entirely on your original down payment. Put down 10% or more, and the premium drops off after 11 years. Put down less than 10% — which includes everyone who used the 3.5% FHA minimum — and the premium lasts the full life of the loan.³

USDA Guarantee Fees

USDA loans, designed for eligible rural areas, charge a 1% upfront guarantee fee and a 0.35% annual fee on the remaining balance.⁴ The annual fee stays for the life of the loan. On a $200,000 USDA loan, the upfront fee adds $2,000 to your balance and the first year’s annual fee runs around $700, considerably cheaper than FHA insurance on the same amount.

VA Funding Fees

VA loans skip ongoing insurance entirely. Instead, the VA charges a one-time funding fee at closing. For first-time use with no down payment, the fee is 2.15% of the loan amount. A 5% down payment drops it to 1.50%, and 10% or more brings it to 1.25%. Subsequent uses carry 3.30% with no down payment. Veterans with a service-connected disability, surviving spouses receiving dependency and indemnity compensation, and active-duty members who received a Purple Heart on or before the closing date are exempt from the fee.⁵

How You Pay the Premium

Most borrowers pay monthly. The premium gets folded into your regular mortgage payment alongside principal, interest, taxes, and homeowners insurance, and your servicer forwards it to the insurer. This spreads the cost out and keeps closing-day cash low.

You can also pay the full premium upfront at closing, either in cash or by rolling it into the loan balance. It can save money over time compared to monthly payments, but it ties up more cash at closing and doesn’t refund cleanly if you sell or refinance early.

A third option is lender-paid mortgage insurance. The lender covers the insurance in exchange for a higher interest rate on your loan. There’s no separate PMI line on your statement, which can make the payment look lower at first. The catch is that you can never cancel LPMI the way you can cancel borrower-paid PMI. The higher rate sticks for the life of the loan unless you refinance, which makes LPMI a poor fit if you plan to stay in the home long enough to build 20% equity.

How to Cancel PMI on a Conventional Loan

Federal law gives you two separate paths to eliminate PMI on a conventional loan, and lenders cannot override either one. Both come from the Homeowners Protection Act.⁶

Request Cancellation at 80% LTV

Once your loan balance reaches 80% of the home’s original value, you can submit a written request to cancel. The threshold is based on what you originally paid, not current market value.⁷ To qualify, you need to meet four conditions:

No payments 30 or more days late in the past 12 months, and no payments 60 or more days late in the 12 months before that.⁷
Current on your payments when you submit the request.
Evidence that the property value hasn’t declined below the original purchase price, if the servicer asks for it.
No second mortgages or home equity lines of credit against the property.⁸

That last condition catches people off guard. A HELOC with a zero balance can still block cancellation until you close the account or get the lienholder to subordinate.

Automatic Termination at 78% LTV

Even if you never submit a request, your servicer must stop charging PMI once your scheduled balance reaches 78% of the original value, as long as you’re current on payments.⁶ If you’re behind, termination kicks in on the first day of the month after you catch up. This exists because many borrowers never think to send the request, and lenders were historically slow to drop the charge on their own.

Cancellation Based on Appreciation

The Homeowners Protection Act uses original value, but Fannie Mae’s servicing guidelines offer a separate path that recognizes a current higher appraisal.⁹ The required LTV depends on how long you’ve owned the home:

Two to five years of ownership: current LTV of 75% or less.
More than five years: current LTV of 80% or less.
Documented home improvements (not routine maintenance) that increased value: the two-year seasoning period can be waived, with an 80% LTV threshold.

You still need the same clean payment record, and the servicer will order an appraisal or property valuation. You pay for it, usually $300 to $600 for a standard single-family home. If the value comes back lower than needed, you’re out the appraisal fee with no refund.

Getting Rid of FHA Mortgage Insurance

FHA mortgage insurance works nothing like conventional PMI on this front. There is no borrower-initiated cancellation and no automatic termination at a specific equity level. If your original down payment was at least 10%, the annual premium ends after 11 years. If it was less than 10%, the premium lasts the entire loan term, no matter how much equity you build or how perfectly you pay.³

The usual way out is refinancing into a conventional loan once you’ve built enough equity. If your current LTV is at or below 80%, the new conventional loan won’t require PMI at all. Even at a slightly higher interest rate, dropping the FHA premium often lowers your total monthly payment. Run the numbers against the closing costs of the refinance before you commit.

The 2026 Tax Deduction

Starting with the 2026 tax year, mortgage insurance premiums are deductible as home mortgage interest on your federal return. The deduction had expired at the end of 2021 and was reinstated for tax years beginning after December 31, 2025. It covers private mortgage insurance, FHA MIP, USDA guarantee fees, and VA funding fees.¹⁰

The deduction phases out for higher earners. It drops by 10% for each $1,000 your adjusted gross income exceeds $100,000, and disappears entirely at $110,000. For married filing separately, the phaseout starts at $50,000. Your lender reports premiums you paid in Box 5 of Form 1098 when the total reaches $600 or more for the year.¹⁰ You have to itemize on Schedule A to claim it; the standard deduction doesn’t capture this benefit.

1
Freddie Mac. Down Payments and PMI
2
Fannie Mae. General Requirements for Credit Scores
3
Department of Housing and Urban Development. Appendix 1.0 – Mortgage Insurance Premiums
4
Rural Development. Upfront Guarantee Fee and Annual Fee
5
Veterans Affairs. VA Funding Fee and Loan Closing Costs
6
Office of the Law Revision Counsel. 12 USC 4902 – Termination of Private Mortgage Insurance
7
Office of the Law Revision Counsel. 12 USC 4901 – Definitions
8
National Credit Union Administration. Homeowners Protection Act (PMI Cancellation Act)
9
Fannie Mae. Termination of Conventional Mortgage Insurance
10
Internal Revenue Service. Instructions for Form 1098