Understanding mortgage insurance
PMI, FHA MIP, the VA funding fee and the USDA guarantee fee — what each one costs, who it protects, and which ones ever go away.
Mortgage insurance protects the lender, not you. It exists so that lenders can approve loans with less than 20% down at all. Understanding which flavor you are being charged, and whether it ever ends, is one of the highest-value things a buyer can learn — it often matters more than a quarter point of rate.
Conventional: private mortgage insurance
PMI is required on conventional loans above 80% loan-to-value. It is priced off your credit score, your loan-to-value, the loan term and the coverage level, so two buyers on the same house can pay very different amounts. Strong credit and 10% down can be genuinely cheap; a 620 score at 97% is not.
The important part: it ends. Under the Homeowners Protection Act you can request cancellation once the principal balance reaches 80% of the original value, and the servicer must terminate it automatically at 78% based on the original amortization schedule, provided you are current. You can also get there faster with a new appraisal showing appreciation, subject to the servicer’s requirements.
FHA: two premiums, and one of them usually never leaves
FHA charges an upfront premium of 1.75% of the loan amount, which is normally financed into the loan, plus an annual premium collected monthly — around 0.55% for typical purchase loans above 95% loan-to-value.
For loans with the minimum 3.5% down, that annual premium lasts the life of the loan. At 90% loan-to-value or below it drops off after 11 years. This is the single biggest long-term cost difference between FHA and conventional, and it is why a buyer with good credit and 5% down often ends up cheaper on conventional even when FHA quotes a lower rate.
The standard exit is refinancing into a conventional loan once you have the equity and the credit profile to do it.
VA: no mortgage insurance, one funding fee
VA loans carry no monthly mortgage insurance at all. Instead there is a one-time funding fee, usually financed: 2.15% on a first use with no down payment, 3.3% on subsequent use, reduced to 1.5% with 5% down and 1.25% with 10% down. An IRRRL refinance is 0.5%.
It is waived entirely for veterans receiving compensation for a service-connected disability. That combination — zero down, no monthly MI, no funding fee — makes VA the best financing available in the country for those who qualify, and it is worth confirming your entitlement even if you assume you have used it.
USDA: a guarantee fee, front and back
USDA charges 1% upfront, financed, plus 0.35% annually collected monthly. The annual fee stays for the life of the loan, but at 0.35% it is meaningfully lower than FHA’s, and USDA is zero down. For an eligible property, it is frequently the cheapest monthly payment on the board.
Side by side
| Program | Upfront | Monthly | Does it end? |
|---|---|---|---|
| Conventional | None | Varies by score and LTV | Yes — 80% on request, 78% automatic |
| FHA | 1.75% financed | ~0.55% annually | Life of loan at 3.5% down; 11 years at ≤90% LTV |
| VA | 2.15% first use, financed | None | No monthly MI at all |
| USDA | 1% financed | 0.35% annually | Life of loan |
Standard published program figures, not a quote. Conventional PMI varies by credit score and loan-to-value.
What about lender-paid MI, or a single premium?
On conventional loans you can sometimes buy the mortgage insurance out with a single upfront premium, or take a slightly higher rate in exchange for the lender covering it. Both can win, and both depend on how long you keep the loan. Single premium is generally not refundable, and a lender-paid structure raises your rate permanently — including after the point where PMI would have fallen off. Ask for the comparison rather than assuming a "no PMI" quote is cheaper.
When you run the numbers on your own scenario, the payment calculator breaks mortgage insurance out as its own line so you can see exactly what it is costing.
Written by
Travis Nicolaysen
Loan Officer, Fairway Home Mortgage · NMLS #1782820
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