Mortgage insurance (PMI and FHA MIP), and how to remove it

What is mortgage insurance?

Mortgage insurance is a policy that pays the lender part of its loss if you stop making payments. You pay for it, but it covers the lender. In exchange, lenders will approve loans with smaller down payments than they otherwise would.

On a conventional loan it's called private mortgage insurance, or PMI. On an FHA loan it's called the mortgage insurance premium, or MIP. They work differently, so it's worth knowing which one you'd have.

When do you have to pay mortgage insurance?

On a conventional loan, you pay PMI when you put down less than 20%, or on a refinance when you owe more than 80% of the home's value.

Every FHA loan has MIP, no matter how much you put down. VA loans for eligible veterans and service members don't have monthly mortgage insurance at all. Do you need 20% down? covers how much buyers really put down.

How much does PMI cost?

PMI depends mostly on your credit score and your down payment. A higher score and a bigger down payment both lower it, and the difference between a strong score and a fair one can be large.

Most people pay PMI as part of their monthly payment. Some loans let you pay it all at closing instead, or take a slightly higher rate and have the lender pay it. Those options can make sense in some cases, but you can't cancel them later the way you can cancel monthly PMI. Your Loan Estimate shows the monthly amount, and your full monthly payment shows where it fits next to taxes and insurance.

How do you get rid of PMI?

PMI comes off once you have enough equity. You can ask your loan servicer to cancel it once your balance reaches 80% of the home's original value, as long as your payments are current. If you don't ask, it ends on its own on the date your original payment schedule says your balance will reach 78% of the original value, as long as your payments are current.

Paying extra toward your principal gets you to 80% sooner, so you can ask to cancel early. It doesn't move the automatic end date, though, so you have to make the request. If your home has gained value, many servicers will also cancel PMI based on a new appraisal, though they usually have rules about how long you've owned the home and how much equity you need. Ask your servicer what theirs are.

How does FHA mortgage insurance work?

FHA loans have two charges. There's an upfront premium of 1.75% of the loan amount, which is usually added to the loan rather than paid in cash. Then there's an annual premium, split into monthly payments.

How long the monthly premium lasts depends on your down payment. With less than 10% down, it stays for the life of the loan. With 10% or more down, it ends after 11 years.

How do you get rid of FHA mortgage insurance?

For most FHA borrowers, the way out is to refinance into a conventional loan once you have enough equity. If your balance is at or below 80% of the home's value when you refinance, the new loan won't have mortgage insurance at all.

That's a common plan for FHA buyers: use FHA to get into the home, then refinance once the equity is there. Just make sure the monthly savings cover the cost of the refinance. When refinancing makes sense walks through that math.

Is FHA or conventional better if you'll pay mortgage insurance either way?

It depends mostly on your credit score. With a strong score, conventional PMI is often cheaper than FHA's premiums, and it comes off on its own. FHA's mortgage insurance premium doesn't change with your credit score at all, so with a lower score FHA can come out ahead.

Your Mortgage Advisor can lay out both side by side with your numbers, including how long you'd pay mortgage insurance on each.

Quick answers

When does PMI go away?

You can ask to cancel it at 80% of your home's original value, and it ends on its own on the date your original payment schedule reaches 78%, as long as your payments are current.

Can you remove FHA mortgage insurance?

With 10% or more down, it ends after 11 years. With less, it lasts for the life of the loan, so most borrowers remove it by refinancing into a conventional loan.

How can I avoid paying PMI?

Put down 20% on a conventional loan, use a VA loan if you're eligible, or choose lender-paid mortgage insurance in exchange for a higher rate.

Do VA loans have mortgage insurance?

No monthly mortgage insurance. Some VA borrowers pay a one-time funding fee. Others, like veterans with a service-connected disability, are exempt.