If you’re buying a home with less than 20% down, or using a government-backed loan like FHA, you’ve probably heard of mortgage insurance. But what exactly is home loan mortgage insurance, why is it required, and is it different from homeowners coverage? We’ll walk you through what it is, how it works, and when it applies, so you can move forward with confidence, not confusion.

What Is Mortgage Insurance on a Home Loan?

Mortgage insurance is designed to protect your lender, not you. Unlike homeowners insurance, which covers your home and belongings, mortgage insurance lowers the lender’s risk in the event you can’t pay your loan.

But why are you the one paying for it? Let’s break it down.

If you’re not putting 20% down, lenders see your loan as a bit riskier. Mortgage insurance helps offset that risk. In most cases, it’s required if:

• You’re putting less than 20% down on a conventional loan.
• You’re using an FHA loan (which requires it no matter your down payment).
• You’re exploring low- or no-down-payment loan options like USDA or VA loans (although VA is an exception…more on that soon).

Think of it as the cost of getting into a home sooner rather than waiting to save up a bigger down payment. It’s not ideal, but it can be a smart trade-off if you’re ready to buy.

When Do You Need Mortgage Insurance?

Not all home loans require mortgage insurance, but it’s important to understand when it’s non-negotiable.

While it’s not a legal matter, lenders have these measures in place to protect themselves and won’t issue you a loan without mortgage insurance under the following circumstances:

Conventional Home Loans

Conventional loans can require private mortgage insurance (PMI) if your down payment isn’t at least 20% of the home’s purchase price. Again, this protection is there so that if you default on the loan, the lender is protected.

FHA Home Loan Mortgage Insurance

For an FHA loan, mortgage insurance isn’t optional; it’s part of the deal. There are two parts to consider:

• Upfront Mortgage Insurance Premium (UFMIP): Typically 1.75% of your loan amount, often rolled into the loan itself.
• Annual Mortgage Insurance Premium (MIP): Paid monthly, usually between 0.45% and 1.05% of the loan balance.

Keep in mind that unless you put down 10% or more, you’ll pay this for the life of the loan. Even with a higher down payment, it still sticks around for at least 11 years.

But FHA loans make homeownership more accessible, especially for buyers with lower credit or limited savings. So for many, the trade-off is worth it.

VA Home Loan Mortgage Insurance

VA loans offer a major advantage for eligible veterans and service members. These loans don’t require mortgage insurance.

That’s because the Department of Veterans Affairs backs a portion of the loan, giving lenders peace of mind without needing traditional coverage.

While you won’t pay monthly mortgage insurance, there is a VA funding fee, typically between 1.25% and 3.3% of the loan amount. This is a one-time cost, and it can usually be rolled into your mortgage.

If you’re eligible, a VA loan is one of the most affordable ways to buy a home with no PMI, no monthly insurance costs, and often no down payment required.

USDA Loans

If your home is in a qualifying rural or suburban area and you’re looking for low-cost financing, a USDA loan is worth considering. These loans let you finance 100% of the home’s cost, with no traditional PMI required.

Instead, you pay two USDA-specific fees:

• Upfront Guarantee Fee: Usually around 1% of the loan, this fee can be rolled into your mortgage to avoid paying out of pocket.
• Annual Guarantee Fee: Equivalent to about 0.35% of your loan balance, this fee is added to your monthly payment, similar to PMI.

Think of these as insurance charges that protect the lender. It’s just like PMI, but typically more affordable. When combined with zero down payment, a USDA loan can be a smart and cost-effective option if you qualify.

How Does Mortgage Insurance Impact Your Monthly Payment?

Mortgage insurance isn’t always cheap, but it doesn’t have to break the bank either. Here’s how it might affect your budget:

Let’s say you buy a $300,000 home with a 5% down payment. If you’re using a conventional loan, you might pay $150 to $250 a month in PMI. With FHA, that monthly number could be slightly higher, depending on your credit score and loan term.

These costs are typically bundled into your mortgage payment. That means when you see that escrow estimate or monthly quote from a lender, PMI is already included.

Still, it helps to know what portion of that is mortgage insurance, so you can plan ahead or shop for ways to reduce it.

Mortgage Insurance vs. Homeowners Insurance: What’s the Difference?

This is a super common question, and an important one. While both types of insurance are tied to your home loan, they serve completely different purposes.

• Mortgage insurance protects your lender if you can’t repay your loan.
• Homeowners insurance protects you: your home, your belongings, and your liability.

Think of it this way:

• Mortgage insurance is about making sure the bank is protected.
• Home insurance is about making sure you’re protected.

Most lenders will require both types of coverage:

• Mortgage insurance is required if you put less than 20% down or use a loan program like FHA.
• Homeowners insurance protects the physical structure and your finances if disaster strikes.

You’ll often see both bundled into your monthly mortgage payment, especially if you’re using an escrow account. That’s why your first mortgage quote might look higher than expected, because it includes:

• Principal and interest
• Mortgage insurance (if applicable)
• Homeowners insurance
• Property taxes

It’s a lot, but each part plays a role. Knowing the difference helps you understand what you’re paying for, and what you’re getting in return.

How Can You Avoid or Remove Mortgage Insurance?

No one wants to pay more than they have to, especially when it comes to monthly mortgage costs. So yes, depending on your loan type, you might be able to skip or drop mortgage insurance. Here’s how:

• Put down 20% or more: With a conventional loan, that usually means you won’t need PMI at all.
• Refinance once you build equity: If your home’s value increases or you’ve paid down enough of your loan to hit 20% equity, refinancing could remove PMI.
• Wait for automatic cancellation: Lenders are required by law to drop PMI when you reach 22% equity, assuming your payments are current.
• Use a VA loan: One of the best perks of a VA loan is no monthly mortgage insurance. Of course, you’ll need to qualify.
• Avoid using an FHA loan: Remember, mortgage insurance on these tends to stick around unless you refinance out of the loan. So, if you’re thinking long-term, it’s something to plan for.

Why Mortgage Insurance Isn’t Always a Bad Thing

Sure, it’s an added cost. But home loan mortgage insurance also helps people buy homes with less cash up front. That can be a game-changer, especially in today’s housing market, where saving 20% can take years.

Look at the bigger picture:

• It opens the door to homeownership for more families.
• It allows buyers to lock in prices now rather than waiting.
• It supports loan programs that help first-time and lower-income buyers.

So, while nobody loves extra fees, mortgage insurance is part of what keeps the market moving and makes owning a home more accessible.

Sources:

CFPB. Accessed July 2025.