How Mortgage Insurance Works: What Every Homebuyer Should Know
Mortgage insurance can cost you thousands—but skipping it could keep you from buying a home. If you've ever wondered what mortgage insurance is and why you're required to pay it, you're not alone.
In this guide, we’ll break down how mortgage insurance works, when you need it, how much it costs, and—most importantly—how to get rid of it.
Let’s demystify this often misunderstood part of homeownership.
What Is Mortgage Insurance?
Mortgage insurance protects the lender—not you—if you can’t make your mortgage payments.
When you buy a home and put down less than 20%, your lender takes on more risk. Mortgage insurance is their safety net.
There are two main types:
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PMI (Private Mortgage Insurance): Common for conventional loans
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MIP (Mortgage Insurance Premium): Required for FHA loans
Quick Fact: Mortgage insurance doesn’t prevent foreclosure—it just reduces the lender’s loss if you default.
Why Do You Have to Pay Mortgage Insurance?
Lenders view low-down-payment borrowers as higher risk. Mortgage insurance:
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Reduces the lender’s financial exposure
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Encourages lenders to approve more loans
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Makes homeownership possible with smaller down payments
Pro Tip: If you want to buy a home with 3%–10% down, mortgage insurance is almost always required.
How Mortgage Insurance Works on Conventional Loans (PMI)
When PMI Is Required:
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Down payment is less than 20%
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Loan is a conventional mortgage (not FHA or VA)
How It’s Paid:
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Monthly premium added to your mortgage payment
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Sometimes paid upfront or split between upfront + monthly
How Much PMI Costs:
PMI usually costs 0.3%–1.5% of your loan amount per year.
| Home Price | Down Payment | Loan Amount | Annual PMI (0.7%) | Monthly Cost |
|---|---|---|---|---|
| $300,000 | 10% ($30,000) | $270,000 | $1,890 | ~$158/month |
Highlight: PMI costs vary based on credit score, loan size, and down payment amount.
How to Cancel PMI
PMI doesn’t last forever—you can get rid of it under the right conditions.
Automatic Cancellation:
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PMI ends automatically when your loan reaches 78% LTV (loan-to-value ratio) based on original home value
Request Early Cancellation:
You can request it when:
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You reach 80% LTV
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You’ve made on-time payments
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Your home hasn’t declined in value
Pro Tip: If your home value has gone up, get a new appraisal to speed up cancellation.
Mortgage Insurance for FHA Loans (MIP)
FHA loans require Mortgage Insurance Premium (MIP)—different from PMI but similar in purpose.
Key Differences:
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MIP is required regardless of down payment
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Has upfront and annual costs
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Usually lasts for the life of the loan if you put down less than 10%
MIP Costs:
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Upfront MIP: 1.75% of loan (can be rolled into the loan)
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Annual MIP: 0.45%–1.05% of loan amount (paid monthly)
| Home Price | Down Payment | Loan Amount | Annual MIP (0.85%) | Monthly Cost |
|---|---|---|---|---|
| $250,000 | 3.5% ($8,750) | $241,250 | $2,050 | ~$171/month |
Pro Tip: MIP applies for the entire loan term unless you refinance into a conventional mortgage.
Can You Avoid Mortgage Insurance?
Yes—but it depends on the loan type and your financial profile.
1. Put Down 20% or More
Avoids PMI entirely on conventional loans.
2. Choose a VA Loan (for veterans)
No mortgage insurance required—even with 0% down.
3. Consider “Lender-Paid PMI”
Some lenders offer to pay your PMI in exchange for a higher interest rate.
Warning: This can cost more over the life of the loan—do the math first!
Is Mortgage Insurance Worth It?
Mortgage insurance adds cost, but it also enables homeownership sooner.
When It’s Worth It:
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You don’t have 20% saved but can afford the monthly payment
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Home prices are rising, and waiting could mean paying more later
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You plan to refinance or build equity quickly
When It’s Not:
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You’re already stretching your budget
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You have better use for the money (e.g., high-interest debt)
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You’re not planning to stay in the home long
Pro Tip: Compare renting vs. buying with mortgage insurance to see what makes more sense for your situation.
Mortgage Insurance in Kenya: What’s the Deal?
In Kenya, traditional PMI doesn’t exist, but lenders use similar tools like:
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Credit life insurance: Pays off the loan if the borrower dies
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Fire or property insurance: Required to protect the lender’s collateral
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Loan cover insurance: Added to mortgage costs, especially for low-deposit buyers
Stat: Banks like KCB, Absa, and Stanbic often include mortgage insurance in your repayment plan—ask for a cost breakdown.
How Mortgage Insurance Affects Your Payment
Let’s look at how mortgage insurance changes a typical monthly mortgage bill:
| Cost Type | With PMI (10% down) | Without PMI (20% down) |
|---|---|---|
| Loan Amount | $270,000 | $240,000 |
| Interest (6.5%) | $1,706 | $1,516 |
| Taxes & Insurance | $400 | $400 |
| PMI | $158 | $0 |
| Total Payment | $2,264 | $1,916 |
Difference: $348/month. Over 5 years, that’s $20,880 in extra payments just from mortgage insurance.
How to Save on Mortgage Insurance
✅ Improve your credit score: Better scores = lower PMI rates
✅ Put down more if possible: 10% down = lower premium than 3%
✅ Ask about different PMI types: Some options are cheaper upfront
✅ Refinance: If your home has gained value, you may be able to drop PMI
✅ Request removal as soon as you qualify: Don’t wait for automatic cancellation
Affiliate Link: Use this free mortgage comparison tool to shop for low-PMI lenders or refinance options.
FAQs About Mortgage Insurance
❓ Can I remove FHA mortgage insurance?
Only by refinancing into a conventional loan once you have 20% equity.
❓ Is PMI tax deductible?
Sometimes—check with your tax advisor. In the U.S., PMI was tax-deductible for many until 2021 (pending changes).
❓ Is mortgage insurance refundable?
Partially. Some upfront MIP on FHA loans may be refunded if you refinance within 3 years.
Final Thoughts: Don’t Fear Mortgage Insurance—Understand It
Mortgage insurance isn’t ideal—but it opens the door to homeownership for millions of people who can’t afford a big down payment.
Instead of avoiding it, learn how to manage, reduce, or eliminate it quickly.
So—are you paying for mortgage insurance you might not need anymore?
Take 5 minutes today to check your loan balance, home value, and lender policies. It could save you hundreds of dollars a month.
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