Mortgage insurance protects lenders from losing money if you default on the loan. Most lenders require private mortgage insurance (PMI) for conventional loans when the home buyer makes a down payment of less than 20%. The same goes for refinancers with less than 20% equity. All FHA loans have mortgage insurance, regardless of down payment amount.
» MORE: FHA vs. conventional loans
How much does mortgage insurance cost?
An FHA mortgage requires an upfront premium, or fee, of 1.75% of the loan amount. You can:
Pay that premium at closing, if you have the cash.
Or you can roll it into your loan amount, which increases your monthly payments slightly because you're borrowing more.
In addition to the upfront premium, you’ll pay a monthly premium that is added to your mortgage payments. This fee varies from 0.45% to 1.05% of the loan amount, per year, depending on:
The loan amount.
The size of the down payment.
The term (the number of years the loan is financed for).
FHA insurance vs. PMI costs
Which costs less per month, FHA mortgage insurance or private mortgage insurance? The answer depends on your credit score.
FHA monthly mortgage insurance payments are lower for borrowers with credit scores under 720, according to the Urban Institute. But monthly payments for PMI are slightly less for borrowers with credit scores of 720 to 739, and significantly less for borrowers with credit scores of 740 and higher.
Removing mortgage insurance
Private mortgage insurance may be canceled after you have gained sufficient equity (usually 20%). It’s canceled automatically after your equity reaches 78% of the purchase price. FHA mortgage insurance can't be canceled if you make a down payment of less than 10%; you get rid of FHA mortgage insurance payments by refinancing the mortgage into a non-FHA loan. When you put 10% or more down on an FHA loan, you pay mortgage insurance premiums for 11 years rather than the life of the loan.
» MORE: How much home can you afford?