Mortgage insurance is a policy that protects the mortgage lender — not the borrower — against financial loss if the borrower defaults on the loan. It exists because loans with smaller down payments carry higher risk for lenders: if the borrower stops paying and the property is foreclosed, a small equity cushion means the lender may not recover the full loan balance from the sale. Mortgage insurance covers this gap.
There are two main types. Private mortgage insurance (PMI) is required on conventional loans when the down payment is less than 20% (LTV above 80%). PMI costs typically range from 0.3% to 1.5% of the original loan amount per year, depending on the down payment, credit score, and loan type. On a $350,000 loan, PMI might cost $88 to $438 per month. The good news: PMI can be cancelled once LTV reaches 80% (through payments or appreciation), and it must be automatically terminated at 78% LTV under the Homeowners Protection Act.
Mortgage insurance premium (MIP) is required on all FHA loans, regardless of down payment. FHA MIP includes an upfront premium (currently 1.75% of the loan amount, usually financed into the loan) and an annual premium (0.55% for most borrowers) paid monthly. Unlike PMI, FHA MIP generally cannot be cancelled for the life of the loan for borrowers who put down less than 10%. VA loans do not require mortgage insurance but do charge a funding fee (1.25% to 3.3%, depending on service history and down payment).
PMI can be paid in several ways: as a monthly premium added to the mortgage payment (most common), as a single upfront premium at closing, as a lender-paid PMI where the lender pays the premium in exchange for a slightly higher interest rate, or as a split premium combining an upfront payment with reduced monthly premiums. Each option has different cost implications over the life of the loan.
Mortgage insurance costs appear on the closing disclosure and are factored into the borrower's monthly PITI payment. At Beycome Title, we ensure MI costs are accurately reflected on all closing documents. Understanding your MI options before closing can save thousands over the life of the loan — especially knowing when and how to cancel it. Use Beycome's mortgage calculator to model payments with and without MI, or get your free closing quote.