Three insurance products attached to home loans use almost identical names but do completely different things. Mixing them up can cost a homeowner thousands of dollars per year in unnecessary premiums.
Private Mortgage Insurance (PMI) on conventional loans
PMI is required on conventional mortgages when the down payment is under 20 percent. It protects the lender, not the borrower. PMI typically costs 0.3 to 1.5 percent of the loan amount annually. Federal law requires automatic cancellation at 78 percent loan-to-value (LTV) and the borrower can request cancellation at 80 percent LTV with a clean payment history and current property value supporting it.
FHA Mortgage Insurance Premium (MIP)
FHA loans require both an upfront MIP (1.75 percent of loan amount, financed into the loan) and an annual MIP (0.15 to 0.75 percent depending on LTV and loan term). Unlike PMI, FHA MIP usually lasts the full life of the loan if the original LTV was above 90 percent. The only way out is to refinance into a conventional loan once you have 20 percent equity.
VA loan funding fee (not technically insurance)
VA loans have no monthly mortgage insurance, just a one time funding fee (1.25 to 3.3 percent of loan amount). Disabled veterans are exempt. This is one of the most underappreciated benefits of VA loans.
Mortgage protection insurance (totally different product)
Mortgage protection insurance is a decreasing term life insurance policy that pays off your mortgage if you die. It protects YOU, not the lender. For most people, a regular term life insurance policy is significantly cheaper for the same death benefit and pays cash to your beneficiaries instead of going directly to the lender.
Quick comparison
| Product | Who it protects | Cost | When it ends |
|---|---|---|---|
| PMI | Lender | 0.3 to 1.5% loan / yr | 78% LTV automatic |
| FHA MIP | Lender | 1.75% upfront + 0.15 to 0.75% yr | Often life of loan |
| VA funding fee | Lender | 1.25 to 3.3% one time | One time |
| Mortgage protection | Borrower's family | Varies (term life pricing) | Loan payoff or term end |
Key takeaways
- PMI is required on conventional mortgages when the down payment is under 20 percent.
- FHA loans require both an upfront MIP (1.75 percent of loan amount, financed into the loan) and an annual MIP (0.15 to 0.75 percent depending on LTV and loan term).
- VA loans have no monthly mortgage insurance, just a one time funding fee (1.25 to 3.3 percent of loan amount).
Final word
Insurance is at its best when you understand the product before you need it. Bookmark this guide, share it with anyone shopping for pmi, fha mip, and mortgage protection this year, and reach out via our contact page if you have a question we have not answered.
Related reading on InsureLab
Sources & further reading
Frequently asked questions
How do I remove PMI from my conventional loan?+
Reach 80 percent LTV based on original purchase price (request cancellation in writing) or wait for automatic cancellation at 78 percent LTV based on amortization.
Is FHA MIP refundable if I refinance early?+
Partially, on a sliding scale during the first 36 months. Most refinances fall outside that window.
Do I need mortgage protection insurance?+
If you have a regular term life insurance policy with a death benefit equal to or greater than your mortgage balance, no.
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