What Is Mortgage Insurance and Do You Need It?

Mortgage insurance is a policy that protects the lender if a borrower stops making payments. It doesn’t protect the buyer directly, but it does allow buyers to purchase a home with a smaller down payment. In many cases, mortgage insurance is what makes homeownership possible sooner rather than later.

The most common type is Private Mortgage Insurance (PMI), which applies to conventional loans when the down payment is below 20 percent. PMI is typically added to your monthly mortgage payment, though some lenders offer lump-sum or split-premium options.

For government-backed loans, the rules are different. FHA loans require both an upfront mortgage insurance premium and an annual premium. USDA loans charge a guarantee fee instead of conventional PMI. VA loans, on the other hand, do not require monthly mortgage insurance but include a one-time funding fee.

So do you actually need mortgage insurance? If you’re putting less than 20 percent down on a conventional loan, the answer is usually yes. The good news is that PMI is not permanent. Once you reach 20 percent equity through payments or appreciation, you can request removal. At 22 percent equity, lenders are often required to drop it automatically if the loan is in good standing. FHA mortgage insurance works differently; depending on your loan terms and down payment amount, it may be removable or may stay for the life of the loan.

Mortgage insurance may feel like an extra cost, but in many situations it’s the trade-off that gets buyers into a home years sooner. Understanding when it applies and how long it stays in place helps you plan your budget and long-term strategy with confidence.

Bottom Line:
Mortgage insurance is a lender safeguard that often comes into play when buyers put less than 20 percent down. It increases your monthly cost, but it can also open the door to homeownership sooner. Know the type of loan you’re using and the rules for removing the insurance.

If you’re weighing loan options and trying to understand your long-term costs, connect with a trusted Central Florida agent who can walk you through the details and help you choose a path that fits your goals.