Mortgage insurance: Is a policy that protects the lender if you stop making payments. It’s usually required when your down payment is under twenty percent.
Wait, Why Am I Paying This?
You finally get your loan estimate. You’re feeling good, the hard part’s over right? You found the house, locked in the rate and maybe even told your friends you’re “under contract.” Then you scroll down a few lines and see something called Mortgage Insurance.
You pause.
You didn’t ask for this. Nobody mentioned it when you were obsessing over Zillow listings at 2 A.M. And now it’s sitting there, hundreds of dollars a month for something you don’t even understand.
So you do what any rational human does: you call your lender.
They say, “Oh, it’s just standard when you put less than 20 percent down.”
You say, “Okay… but what is mortgage insurance exactly?”
And that’s when they start mumbling about “protecting the lender in case of default,” and your eyes glaze over faster than your home appraiser on a Friday afternoon.
Here’s the truth: mortgage insurance isn’t some scam (even though it feels like it). It’s just the bank’s way of saying,
“We’ll give you the house, but we’re gonna need a little insurance on that trust.”
In this post, I’m breaking down exactly what mortgage insurance is, why you’re paying it, how much it really costs and most importantly… how to get rid of it fast.
Because once you understand what it is, it’s a whole lot easier to make it disappear.
What Is Mortgage Insurance? (Let’s Keep It Simple)
Mortgage insurance is basically a safety net for your lender. When you buy a house and put down less than twenty percent, the lender sees you as a higher risk. They’re handing you a few hundred thousand dollars and if you stop making payments, they don’t want to be left holding the bag.
So they make you pay for an insurance policy that protects them, not you.
Here’s the short answer.
Mortgage insurance is a policy that protects the lender if you stop making payments. It’s usually required when your down payment is under twenty percent.
That’s it. Nothing fancy.
You’re paying for their peace of mind. It doesn’t cover you if you lose your job or your home burns down. It just makes sure the lender gets paid if things go sideways.
I like to think of it like this…
It’s like loaning your buddy your car and then paying his insurance bill in case he wrecks it. Doesn’t make a lot of sense at first, but it’s the only way the lender feels comfortable giving you the keys.
Now before you get mad, here’s the upside. Mortgage insurance is what lets a lot of people buy a home years earlier. Without it, you’d have to wait until you saved a full twenty percent down. For most people that’s not happening anytime soon.
So yeah, you’re paying for their protection, but it’s also the reason you’re not still renting right now.
Why Lenders Make You Pay It?
Here’s the thing. Lenders don’t actually want to foreclose on anyone. It’s expensive, it’s messy, and it takes forever. But they also don’t want to take a big loss if someone stops paying.
So when a buyer comes in with less than twenty percent down, that’s a red flag. To them, it means you’ve got less skin in the game. If home prices drop or you hit a rough patch, you’re more likely to walk away.
Mortgage insurance is their safety blanket. It shifts that risk off their books. If you stop paying, the insurance company steps in and covers a portion of the loss.
From the lender’s perspective, it’s a win-win. They get to approve more loans, collect more interest, and still sleep at night knowing they’re covered.
From your perspective, it’s an extra monthly cost that feels like a penalty for not being rich enough to drop a massive down payment.
Think of it like this. You and the bank are both taking a leap together, but you’re the one paying for the parachute.
It’s frustrating, sure, but it’s also what makes lower down payment loans possible in the first place. Without it, first-time buyers would be locked out of the market completely.
Not all mortgage insurance is the same. It depends on what kind of loan you have. Some are private, some are government-backed, and some sneak into your loan in ways you don’t notice at first. Here’s how they break down.
Private Mortgage Insurance (PMI)
This one’s for conventional loans. If you put down less than twenty percent, your lender will tack PMI onto your monthly payment. The good news is it doesn’t last forever. Once you hit twenty percent equity, you can ask for it to be removed. At seventy-eight percent, they have to remove it automatically.
PMI is the most common form of mortgage insurance, and the one most people complain about.
Mortgage Insurance Premium (MIP)
If you have an FHA loan, you’re paying something called MIP. It works the same way as PMI, but the rules are stricter. FHA loans require an upfront payment when you close and an annual premium added to your mortgage.
Here’s the annoying part. For most FHA loans, you can’t remove MIP unless you refinance into a conventional loan. So if you’re stuck with it, refinancing later might be your ticket out. \
VA and USDA Loans
If you’re using a VA loan, there’s no monthly mortgage insurance, but you’ll pay a one-time funding fee instead. It’s built into your loan, so you won’t see it every month, but it still exists.
USDA loans are similar. They don’t call it mortgage insurance, but they have an upfront guarantee fee and a small annual fee. It’s the same idea with a different name.
How Much Mortgage Insurance Costs
Now that we know what mortgage insurance is, let’s talk about what everyone actually wants to know. How much does it cost?
The short answer: it depends.
Mortgage insurance is usually somewhere between 0.3% and 1.5% of your loan amount per year. That doesn’t sound terrible until you see the math.
Let’s say you buy a $350,000 house and put down 10%. That means your loan amount is $315,000. If your PMI rate is 0.8%, that’s $2,520 per year or about $210 a month added to your mortgage payment.
And that’s on top of your principal, interest, taxes, and homeowners insurance.
The actual number depends on a few things:
- Your credit score. Higher score, lower PMI rate.
- Your down payment. The closer you are to 20%, the cheaper it gets.
- Loan type. FHA, conventional, or USDA all have different rates.
- Loan term. A 15-year loan usually has lower PMI than a 30-year.
Most lenders will give you an estimate during the pre-approval process, but it’s rarely explained in plain English.
Here’s the reality. Mortgage insurance doesn’t have to break the deal. It’s not forever, and the extra $150 to $250 a month is often what lets people buy sooner instead of waiting years to save a massive down payment.
Still, it adds up. And that’s why learning how to remove it as fast as possible is where things get interesting.
The Real Question: How Can You Get Rid of It Fast?
Here’s the part everyone wants to know. How do you get rid of mortgage insurance once you’ve got it?
The good news is it’s not permanent. But the bad news is it won’t disappear on its own right away. You have to hit certain milestones or take a few steps to make it happen.
If you’re ready to go deeper, check out my full guide on How To Get Rid of PMI Fast (Even If You Just Bought Your House)
Let’s go through the main ways to drop it.
1. Hit 20% Equity
This is the classic route. Once you’ve paid down your mortgage enough to own twenty percent of your home, you can ask your lender to remove PMI. They won’t remind you when that happens, so you’ll need to keep an eye on it yourself.
When you hit 80% loan-to-value (LTV), you can request cancellation. When you hit 78%, the lender is required by law to remove it automatically.
Consumer Financial Protection Bureau: How to Cancel PMI
If your loan started at $300,000, you’ll need to get your balance down to $240,000 to cross that 20% mark.
2. Refinance Your Loan
If you bought with an FHA loan, this is usually the only way out. FHA mortgage insurance (MIP) sticks around for the life of the loan unless you refinance into a conventional loan.
Refinancing also works if your home value has gone up a lot since you bought. (Refinancing blog post coming soon) You could have enough equity now to qualify for a conventional loan with no PMI at all.
Yes, refinancing comes with closing costs, but if you’re saving a couple hundred bucks a month by removing PMI, it’s usually worth it.
3. Get a New Appraisal
Home prices move fast, and if your home value has jumped, you might already have the equity you need to remove PMI. Ask your lender if they’ll accept a new appraisal.
Example: You bought for $350,000 and put down 10%. Two years later, homes in your area are selling for $400,000. That extra $50,000 in value could push you past 20% equity.
A quick appraisal could save you thousands a year.
4. Pay a Little Extra Each Month
If refinancing isn’t in the cards, start putting a little extra toward your principal. Even $100 a month can shave off months or years from your PMI timeline. It’s not glamorous, but it works.
5. Check for Automatic Termination
Some people forget this part. For conventional loans, lenders must cancel PMI once your loan balance hits 78% of the home’s original value, as long as your payments are on time.
Still, don’t wait around hoping they’ll notice. Keep track and follow up.
The bottom line is simple. Mortgage insurance doesn’t have to be forever. If you play it smart, you can drop it way sooner than most people realize.
And once you do, that extra $150 or $200 a month can finally go toward something fun like a vacation, a kitchen upgrade, or, let’s be real, probably your next round of closing costs.
Can You Avoid Paying It Altogether?
Now that you know how to get rid of mortgage insurance, let’s talk about how to avoid it completely. Because let’s be honest, the best PMI is no PMI at all.
It’s possible, but it usually comes with trade-offs. Here are the main ways people skip mortgage insurance altogether.
1. Put 20% Down
The simplest way is to put down twenty percent. If your down payment hits that mark, you’re good… no PMI, no extra fees, nothing.
But that’s easier said than done. On a $400,000 home, twenty percent is $80,000 in cash. For most first-time buyers, that’s just not realistic. So unless you’ve got savings, equity from a previous home, or help from family, this option can feel out of reach.
2. Use a Piggyback Loan (80/10/10)
This is an old-school trick that still works. Here’s how it goes. You take out two loans instead of one.
- The first loan covers 80% of the home’s value.
- The second loan covers 10%.
- You put down the final 10% in cash.
Because your main loan only covers 80%, there’s no PMI. The catch is the second loan usually has a higher interest rate. Still, depending on the numbers, it can be cheaper than paying PMI every month.
3. Lender-Paid Mortgage Insurance (LPMI)
Some lenders offer what’s called lender-paid mortgage insurance. It sounds like they’re doing you a favor, but here’s the truth. You’re still paying for it — just in a different way.
Instead of charging PMI each month, the lender builds the cost into your interest rate. Your monthly payment looks cleaner, but you’ll pay more over the life of the loan. It’s a good option if you plan to refinance or sell in a few years, but not ideal if you’re staying long-term.
4. First-Time Buyer or Down Payment Assistance Programs
Depending on where you live, you might qualify for programs that cover part of your down payment or even your mortgage insurance. Local housing authorities and credit unions often have these. It takes some digging, but it’s worth checking out.
At the end of the day, avoiding mortgage insurance comes down to how much cash you can put down or how creative you’re willing to get with your financing. For some people, it makes sense to pay PMI for a few years and just get into the market sooner.
Waiting to save a huge down payment might feel smarter, but if home prices keep climbing, you’ll lose more in appreciation than you’ll ever save avoiding PMI.
So don’t beat yourself up for paying it. Just have a plan to drop it.
Is Mortgage Insurance Tax Deductible?
Here’s where things get a little tricky. For a few years, mortgage insurance premiums were tax deductible. Then Congress let that deduction expire. Then they brought it back. Then they killed it again.
As of now, mortgage insurance is not tax deductible for most homeowners. The deduction officially expired after the 2021 tax year and hasn’t been renewed since. That could always change, but don’t count on it. See IRS Publication 936 (Mortgage Interest Deduction)
Some websites and lenders still list it as a deduction because those articles never get updated, which only makes things more confusing.
The truth is simple. If you’re filing your taxes this year, you can’t deduct your mortgage insurance premiums.
If Congress revives the deduction later, your accountant will know before Google does.
So the short answer… check with a CPA.
Even though you can’t write it off right now, you can still remove it altogether by building equity or refinancing, which saves you way more in the long run than any deduction ever would.
Why It’s Not Always the Enemy
It’s easy to hate mortgage insurance. It feels like you’re paying for something that gives you nothing in return. But here’s the flip side — it’s also the thing that probably got you into your home in the first place.
Without mortgage insurance, lenders would require everyone to put down twenty percent. That means if you were buying a $400,000 home, you’d need eighty grand in cash just to get a foot in the door. Most people aren’t sitting on that kind of money.
Mortgage insurance bridges that gap. It lets you buy with 3%, 5%, or 10% down instead of waiting years to save up. Sure, you’re paying a little extra each month, but you’re also building equity, locking in your price, and avoiding rent that does nothing for you.
Here’s a quick way to look at it.
Let’s say your PMI costs $200 a month. That’s $2,400 a year. Sounds like a lot until you realize home values in your area are going up by $10,000 or more each year. You’re still coming out way ahead.
So no, mortgage insurance isn’t fun, but it’s not the villain it’s made out to be. It’s a tool, one that helps you get in the game sooner.
The key is knowing how to play it. Use it to buy your home, build equity fast, and then kick it to the curb when the time is right.
Recap & Next Steps
Alright, let’s wrap this up.
Mortgage insurance isn’t the scam it first looks like, but it’s also not your friend. It’s the price you pay for getting into a home sooner instead of waiting years to save a massive down payment.
Here’s what to remember:
- Mortgage insurance protects the lender, not you
- It’s usually required if you put down less than twenty percent
- You can remove it once you hit twenty percent equity or refinance
- FHA loans hold onto it longer, but you can escape by switching to a conventional loan
- Paying a little extra each month or watching your home value climb can help you reach that 20% mark faster
Once it’s gone, that’s more money staying in your pocket every month — and that’s the real goal here.
If you’re not sure how close you are to dropping your PMI, talk to your lender or grab your latest mortgage statement. You might be closer than you think.
And if you’re just starting the homebuying process, don’t let mortgage insurance scare you. It’s just part of the journey. Use it, outgrow it, and move on.
Because at the end of the day, the only thing better than owning your home… is owning it without paying extra for the lender’s peace of mind.
