What Is Mortgage Insurance and How Does It Work?

Mortgage insurance is a policy or government guarantee that pays the lender part of its loss if you stop paying and a foreclosure sale does not cover what you owe. You pay for it, but it protects the lender. Conventional loans with less than 20% down require private mortgage insurance (PMI), FHA loans charge a mortgage insurance premium (MIP) on every loan, USDA loans charge a guarantee fee, and VA loans replace mortgage insurance with a one-time funding fee.

Who does mortgage insurance protect?

The lender, or whoever owns your loan. If you default and the home sells at foreclosure for less than the loan balance, the insurer (a private company, FHA, or USDA) or the VA guarantee covers part of the shortfall. That reduced risk is what lets a lender approve a loan with a small down payment.

Mortgage insurance does not protect you. It does not make your payments if you lose income, and it does not stop a foreclosure. Policies sold as "mortgage protection" insurance are a separate, optional product, usually life insurance that pays toward the loan if you die. See whether you should buy mortgage insurance for how the costs compare to putting more money down.

How does PMI work on a conventional loan?

When it is required. A lender will usually require PMI on a conventional loan, meaning one not insured or guaranteed by a government agency, when your down payment is less than 20% of the price. It can also apply when you refinance with less than 20% equity. The requirements of a Fannie Mae or Freddie Mac loan cover the rest of the loan rules.

How you pay. Lenders offer some or all of these options:

• Monthly premium. The most common. It is added to your mortgage payment and shown on page 1 of your Loan Estimate.
• Single upfront premium. One payment at closing. If you sell or refinance early, you may not get any of it back.
• Split premium. Part at closing and a smaller monthly charge.
• Lender-paid mortgage insurance (LPMI). The lender pays the premium and charges you a higher interest rate. Federal law requires the lender to tell you in writing, no later than the date of the loan commitment, that LPMI cannot be canceled and ends only when you refinance, sell, or pay off the loan.

What it costs. The insurer sets the price from your credit score, down payment, and the amount of coverage. In the Urban Institute's September 2026 data from Enact Mortgage Insurance, annual PMI on a loan with 3.5% down ranged from 0.46% of the loan for scores of 760 or higher to 1.50% for scores of 620 to 639. Per $100,000 borrowed, that is about $38 to $125 a month. Those rates assume 25% coverage, the level Fannie Mae's HomeReady and Freddie Mac's Home Possible loans use. A standard 30-year Fannie Mae loan at that down payment needs 35% coverage, which usually costs more, so get a quote. A larger down payment lowers the rate. For a full worked example, see how to calculate mortgage insurance.

How it ends. Borrower-paid PMI on a home you live in, on loans closed since July 29, 1999, has three federal exits:

1. You ask. Once your balance reaches 80% of the home's original value (the lower of price or appraisal at purchase, or for a refinance, the appraised value used to approve the refinance), you can request cancellation in writing. You need a good payment history, current payments, no second mortgage, and, if the servicer asks, proof that the home has not lost value.
2. It ends automatically. The servicer must drop PMI when your balance is scheduled to reach 78% of the original value, as long as you are current.
3. Final termination. If neither happened earlier, PMI must end the month after the loan's midpoint, which is 15 years into a 30-year loan, as long as you are current.

Other ways to get rid of it, such as a new appraisal or refinancing, are in how to avoid or remove PMI.

How does FHA mortgage insurance work?

Every FHA loan has two charges, and your credit score does not change either one:

• Upfront MIP: 1.75% of the base loan amount, which you can pay at closing or add to the loan. On a $300,000 loan, that is $5,250.
• Annual MIP: for loans over 15 years, 0.50% to 0.75% a year depending on loan size and down payment, paid in monthly installments. The typical loan, with 3.5% down and a balance of $726,200 or less, pays 0.55%. Loans of 15 years or less pay 0.15% to 0.65%.

The federal PMI cancellation rules do not apply to FHA. Under HUD's rules for loans since March 20, 2023, annual MIP lasts 11 years if your starting loan-to-value ratio was 90% or less, which means a down payment of at least 10%. With less down, it lasts as long as the loan. The way out is to sell, pay off the loan, or refinance into a conventional loan without PMI once you have at least 20% equity. A refinance needs a new lender approval of your credit and income, and it only saves money if the MIP you drop outweighs the closing costs and any change in rate. See FHA loan requirements for the rest of the program rules.

How does the USDA guarantee fee work?

USDA guaranteed loans charge a guarantee fee instead of mortgage insurance. For fiscal year 2027, which runs October 1, 2026 through September 30, 2027, the fees are:

• Upfront fee: 1.00% of the loan, which can be paid at closing or financed. On a $250,000 loan, that is $2,500.
• Annual fee: 0.35% of the average scheduled balance each year, paid monthly. On a $250,000 loan, the first year is about $73 a month.

The annual fee lasts for the life of the loan. USDA can change both rates each fiscal year, so confirm the current rates with your lender.

How does the VA funding fee work?

VA loans have no monthly mortgage insurance. The VA guarantee covers part of the lender's loss instead, and you pay a one-time funding fee at closing or add it to the loan. Rates in effect since April 7, 2023:

On a $300,000 purchase with no down payment on first use, the fee is $6,450. You pay no funding fee if you receive VA compensation for a service-connected disability, are a surviving spouse receiving Dependency and Indemnity Compensation, or are an active-duty service member who shows proof of a Purple Heart by closing, among other exemptions VA lists. For eligibility and entitlement, see VA loan requirements.