If you’re buying a home with less than 20% down, mortgage insurance is part of the conversation — regardless of which loan program you use. Every major loan type has its own version of mortgage insurance, its own cost structure, and its own rules for when and whether it can be removed. This page explains all of them in simple terms.
What Is Mortgage Insurance and Who Does It Protect?
Mortgage insurance protects the lender — not the borrower — in the event of default. When a buyer puts less than 20% down, the lender is taking on more risk. Mortgage insurance offsets that risk by guaranteeing the lender will be compensated if the loan goes into default.
Every major loan program has its own version of mortgage insurance. The name, cost structure, and cancellation rules differ significantly by program — which is one reason why comparing loan programs on monthly payment alone can be misleading. The total cost of mortgage insurance over time is a critical part of the comparison.
Conventional Loans: Private Mortgage Insurance (PMI)
On conventional loans, mortgage insurance is called private mortgage insurance or PMI. It is required when your down payment is less than 20% of the purchase price, putting your loan-to-value ratio above 80%.
PMI is risk-based — the cost is influenced by your credit score, LTV ratio, loan type, and other factors. Most borrowers pay between 0.2% and 2% of the loan amount annually, with the majority landing in the 0.5%–1% range. A borrower with a 760+ score at 90% LTV will pay significantly less than a borrower with a 640 score at the same LTV.
Conventional PMI comes in four structures — monthly, single premium, split premium, and lender-paid. Each has different upfront costs, monthly payment impacts, and cancellation rules.
Removing PMI on a Conventional Loan
One of the most significant advantages of conventional PMI over FHA mortgage insurance is that it can be cancelled. There are three ways this happens:
PMI and Low Appraisals
A low appraisal can affect your mortgage insurance in ways buyers don’t always anticipate. When an appraisal comes in below the purchase price, the lender bases the loan-to-value ratio on the appraised value — not the purchase price. This means your effective LTV may be higher than you planned, which can trigger PMI when you didn’t expect it, increase your PMI rate tier, or in some cases affect your loan program eligibility.
For example, a buyer planning a 10% down payment on a $600,000 home expects a 90% LTV. If the appraisal comes in at $580,000, the lender calculates LTV based on the lower of the two values — meaning the buyer either needs to bring additional cash to closing to maintain the 90% LTV, or the loan restructures at a higher LTV with a correspondingly higher PMI rate.
This is one reason why understanding your PMI tiers before you make an offer matters — so you’re not surprised by a rate change if the appraisal doesn’t come in at value.
FHA Loans: Mortgage Insurance Premium (MIP)
FHA loans require mortgage insurance regardless of down payment size. It comes in two parts:
When Does FHA MIP Drop Off?
This is one of the most misunderstood aspects of FHA financing. For loans originated after June 2013 with a down payment of less than 10%, the annual MIP remains for the life of the loan — it never cancels automatically. The only way to remove it is to refinance into a conventional loan once you have sufficient equity.
For FHA loans with a down payment of 10% or more, MIP cancels after 11 years.
VA Loans: The VA Funding Fee
VA loans do not require monthly mortgage insurance — which is one of their most significant advantages. However, most VA borrowers pay a one-time VA funding fee at closing. This fee helps fund the VA loan program and offsets the cost to taxpayers when loans go into default. The funding fee is typically financed into the loan rather than paid in cash.
Purchase and Construction Loans
Applies to Veterans, active-duty service members, and National Guard and Reserve members.
| Type of Use | Down Payment | Funding Fee |
|---|---|---|
| First use | Less than 5% | 2.15% |
| First use | 5% or more | 1.50% |
| First use | 10% or more | 1.25% |
| After first use | Less than 5% | 3.30% |
| After first use | 5% or more | 1.50% |
| After first use | 10% or more | 1.25% |
Cash-Out Refinance Loans
Applies to Veterans, active-duty service members, and National Guard and Reserve members. The funding fee rate for cash-out refinancing does not change based on down payment amount.
| Type of Use | Funding Fee |
|---|---|
| First use | 2.15% |
| After first use | 3.30% |
Native American Direct Loan (NADL)
| Loan Type | Funding Fee |
|---|---|
| Purchase | 1.25% |
| Refinance | 0.50% |
Other VA Loan Types
The funding fee rates for these loan types do not change based on down payment amount or prior VA loan use.
| Loan Type | Funding Fee |
|---|---|
| Interest Rate Reduction Refinancing Loan (IRRRL) | 0.50% |
| Manufactured home loan (not permanently affixed) | 1.00% |
| Loan assumption | 0.50% |
| Vendee loan (purchasing VA-acquired property) | 2.25% |
VA Funding Fee Exemptions
The following borrowers are exempt from the VA funding fee entirely:
Despite the funding fee, VA loans remain the most cost-effective financing option for eligible borrowers in most scenarios — no monthly mortgage insurance and no down payment required is a significant long-term advantage.
USDA Loans: The Guarantee Fee
USDA loans, available for eligible rural and suburban properties in Washington State, do not require private mortgage insurance but do carry their own mortgage insurance equivalent — called the guarantee fee. Like VA, it comes in two parts:
For buyers purchasing in eligible areas, USDA financing often compares favorably to FHA on total cost — lower annual fee, no down payment requirement, and competitive interest rates. The primary limitation is geographic eligibility.
Mortgage Insurance by Loan Program: Quick Reference
Here’s a side-by-side comparison of mortgage insurance across the four major loan programs.
| Loan Program | Upfront Cost | Monthly Cost | Cancellable? |
|---|---|---|---|
| Conventional (PMI) | None (monthly) or lump sum (single/split premium) | 0.2%–2% annually — risk-based | Yes — at 80% LTV or via appreciation + appraisal |
| FHA (MIP) | 1.75% of loan amount (financed) | ~0.55% annually | No — life of loan if <10% down. 11 years if 10%+ down. |
| VA (Funding Fee) | 1.25%–3.3% of loan amount (financed) — exemptions available | None | N/A — no monthly MI |
| USDA (Guarantee Fee) | 1.0% of loan amount (financed) | 0.35% annually — decreases as balance drops | No automatic cancellation — decreases over time |
Avoiding PMI With a Piggyback Loan
A piggyback loan — sometimes called an 80/10/10 or 80/15/5 — is a strategy where a buyer takes out a first mortgage at 80% LTV and a second mortgage to cover part or all of the remaining balance, avoiding PMI on the first mortgage entirely.
For example, on a $500,000 purchase with 10% down, an 80/10/10 structure would be a $400,000 first mortgage (80% LTV — no PMI), a $50,000 second mortgage (10%), and a $50,000 down payment (10%). The second mortgage typically carries a higher interest rate than the first, so whether this structure makes sense depends on the rate differential and how long you plan to stay in the home.
Piggyback loans are not available through all lenders and require qualifying for two loans simultaneously. Ask your loan officer whether this structure makes sense for your scenario.
Want to Compare Mortgage Insurance Costs for Your Scenario?
The right loan program and mortgage insurance structure depends on your credit profile, down payment, how long you plan to stay, and what cash you have available at closing. I run detailed cost comparisons for Washington State buyers — including side-by-side breakdowns of conventional PMI vs. FHA MIP for your specific numbers.
