Quick primer

Mortgage insurance on high-LTV loans is charged because the borrower has limited initial equity — typically less than 20% down — and the lender wants protection against default. Two broad categories dominate the U.S. market: Private Mortgage Insurance (PMI) for conventional loans and mortgage insurance premiums (MIP) for Federal Housing Administration (FHA) loans. Each type has different pricing structures, cancellation rules, and payment options.

(For more about PMI, MIP, and when insurance drops off, see our glossary entry: Mortgage Insurance: PMI, MIP, and When It Drops Off. For the role of LTV specifically, see: Understanding Loan-to-Value (LTV): How It Affects Your Mortgage.)

Why cost matters (short)

Mortgage insurance can add hundreds of dollars a month to your housing payment or a few percentage points upfront. Over the first few years of a mortgage—when LTV is highest—insurance is often a larger recurring expense than property tax changes or minor rate variations.

How mortgage insurance costs are calculated — the core factors

Lenders and mortgage insurers price coverage using a combination of objective and discretionary inputs. The most important drivers are:

  • Loan-to-Value (LTV): Higher LTV → higher risk → higher insurance rates. The standard threshold is 80% LTV; above that, PMI or MIP applies.
  • Credit score: Lower credit scores translate to higher premium rates.
  • Loan size and type: Jumbo loans and non-conforming loans often have different pricing. FHA loans use program-specific MIP rules.
  • Loan term and amortization: Longer terms can mean higher cumulative risk.
  • Property type and occupancy: Investment properties and second homes generally face higher premiums than owner-occupied primary residences.
  • Payment method: Monthly vs. upfront vs. financed single-premium structures change effective cost.

These variables are combined into a rate (expressed as an annual percentage of the loan amount). The two common pricing presentations:

  • Annual percentage rate: e.g., 0.5%–1.5% of the original loan balance per year.
  • Upfront charge: a one-time percentage of the loan (e.g., FHA UFMIP) that is either paid at closing or rolled into the loan.

Sources: Consumer Financial Protection Bureau (CFPB) and FHA/HUD program guidance explain the program differences and typical pricing drivers (CFPB; HUD/FHA).

Basic formulas and examples

General calculation steps for an annual PMI-style charge:

  • Annual premium = insurance rate × loan amount
  • Monthly premium = annual premium ÷ 12

Example A — Conventional PMI (illustrative):

  • Home price: $300,000
  • Down payment: 10% ($30,000) → Loan amount = $270,000 → LTV = 90%
  • Assumed PMI rate: 0.8% annually (typical range 0.3%–1.5% depending on credit/LTV)
  • Annual PMI = 0.008 × $270,000 = $2,160
  • Monthly PMI ≈ $180

Example B — FHA (UFMIP + annual MIP):

  • FHA typically assesses an Upfront Mortgage Insurance Premium (UFMIP) — commonly 1.75% of loan amount — plus an annual MIP that is divided into monthly payments. The UFMIP can be financed into the loan balance.
  • Same $270,000 loan with FHA: UFMIP = 0.0175 × $270,000 = $4,725 (can be added to loan). Annual MIP depends on term and LTV but often runs higher than comparable PMI for low-LTV borrowers; consult HUD/FHA program pages for current rates (HUD/FHA).

Note: Actual rates vary by insurer and lender pricing. PMI for a borrower with an excellent score and 90% LTV might be closer to 0.3%–0.6%; a borrower with a lower score could pay 1% or more.

Payment structures and how they change effective cost

  • Monthly PMI: Common for conventional loans; predictable but cumulative.
  • Upfront single premium (paid at closing or financed): Lowers monthly payment but increases loan balance; can be cheaper long-term if you plan to keep the loan.
  • Split-premium plans: Partial upfront plus reduced monthly premiums.
  • Lender-paid mortgage insurance (LPMI): Lender pays the premium but charges a higher interest rate. LPMI cannot be canceled in the same way PMI can; it disappears only when you refinance or pay off the loan.

Ask lenders for APR and total-cost comparisons across these options, not only the quoted monthly premium.

Rules for ending mortgage insurance

Conventional PMI (private insurance):

  • Borrowers may request cancellation once the unpaid principal balance reaches 80% of the original value and the loan is in good standing. Lenders must automatically terminate PMI when the balance reaches 78% (Homeowners Protection Act requirements) for most loans backed by fully amortizing mortgages (CFPB).
  • Lenders may use original value or current appraised value depending on the contract — confirm the standard used in your loan documents.

FHA MIP (program-specific):

  • FHA rules differ from PMI. For most FHA loans originated after 2009 and especially after 2013 rule changes, if the borrower’s down payment was less than 10%, annual MIP generally remains for the life of the loan; if the down payment was 10% or more, MIP typically lasts 11 years. These rules are set by HUD/FHA and can be program-specific (HUD/FHA).

Because cancellation rules differ, conventional PMI is often easier to remove through regular amortization or targeted principal pay-downs. FHA borrowers frequently refinance to a conventional loan once they have sufficient equity and credit.

How mortgage insurance affects affordability and refinancing decisions

  • Monthly mortgage insurance increases your front-end housing payment and affects qualifying debt-to-income (DTI) ratios.
  • If you plan to refinance, compare the break-even between removing insurance via PMI cancellation versus refinancing costs and new interest rates (see our guide: Mortgage Refinancing: When to Refinance and Cost Considerations).

Practical strategies to reduce or avoid PMI/MIP costs

  • Save a larger down payment (20% avoids conventional PMI).
  • Improve your credit score before applying — even a 20–40 point boost can reduce PMI rates noticeably.
  • Shop multiple lenders and request insurer rate sheets or sample quotes.
  • Consider a piggyback loan (80–10–10) where a second loan covers part of the down payment; this can avoid PMI but adds complexity and usually a higher rate on the second lien.
  • Evaluate lender-paid MI vs. borrower-paid PMI: lender-paid may mean a higher rate; do the math for your expected hold period.
  • If you already have PMI, track your equity and formally request cancellation at 80% LTV, and check for automatic termination at 78% LTV.

Common mistakes and misconceptions

  • “PMI lasts forever.” Not true for conventional PMI — it cancels at 78% by law and can be requested at 80% if you meet lender conditions.
  • “FHA MIP cancels the same way.” FHA has different MIP rules; many FHA loans keep MIP for life unless refinanced into a conventional loan.
  • “All mortgage insurance payments are equivalent.” PMI, MIP, lender-paid MI, and single-upfront premiums each have different economics.

Tax treatment (brief and cautious)

The tax rules for mortgage insurance premiums have changed over time. Tax laws affecting deductibility have been extended and expired in different tax years. Before assuming premium payments are deductible, check current IRS publications and consult a tax professional. Useful starting points: IRS consumer pages and Publication 936 (mortgage interest) for related guidance (IRS).

Quick checklist before you sign

  • Ask how the insurer calculates cancellation (original value vs. current appraisal).
  • Get both monthly and total-upfront premium quotes.
  • Compare lender-paid MI vs. borrower-paid PMI across hold periods.
  • Confirm FHA MIP rules if you’re using an FHA product.
  • Document requests for PMI cancellation in writing and maintain payment history.

FAQ (short)

Q: Can I refinance to remove mortgage insurance?
A: Yes — if you refinance into a conventional loan with ≤80% LTV (or get lender approval to cancel), you can remove PMI. Consider closing costs and the new rate.

Q: Does mortgage insurance protect me?
A: No. Mortgage insurance protects the lender or insurer, not the borrower. It reduces lender losses if you default.

Q: Will my PMI rate drop as my credit score improves?
A: The rate on an existing contract generally does not change; better credit helps you get a lower rate when shopping for a new loan or a refinance.

Professional disclaimer

This article is educational and reflects standard program rules and industry practice as of 2025. It is not individualized financial, tax, or legal advice. For specific guidance, consult a licensed mortgage professional or tax advisor and check current CFPB, HUD/FHA, and IRS guidance.

Primary sources and further reading

Internal resources referenced in this article:

If you want, I can prepare a side-by-side numeric worksheet that compares monthly vs. upfront PMI for a specific loan scenario (you provide price, down payment, credit score range).