Do You Need Mortgage Insurance If You Put Down Less Than 20%?
In most cases, yes — mortgage insurance is required when a borrower makes a down payment of less than 20%. However, there are some exceptions. Certain loan programs and down payment assistance options can help reduce or eliminate the need for mortgage insurance altogether. Some lenders also offer Lender-Paid Private Mortgage Insurance (PMI), which removes the monthly insurance requirement in exchange for a slightly higher interest rate.
Mortgage insurance rules and costs vary by loan type, so understanding your options is an important step in choosing the right mortgage. Let’s explore how it works and what to expect.
Why Mortgage Insurance Exists
Your down payment represents your investment—or stake—in the property. When that stake is small (less than 20%), the lender assumes more risk. Mortgage insurance helps offset that risk by protecting the lender in the event of default. In return, it allows borrowers to qualify for a home loan with a smaller initial investment.
Mortgage Insurance by Loan Type
Each mortgage program has its own approach to insurance or related fees:
Conventional Loans
Backed by Fannie Mae and Freddie Mac, conventional loans typically require Private Mortgage Insurance (PMI) for borrowers with less than 20% down. The good news: PMI is temporary. Once your loan balance drops to 80% of your home’s value, you can request to have it removed.
FHA Loans
FHA loans are government-backed and include two forms of Mortgage Insurance Premiums (MIP):
- An upfront premium (called UFMIP) due at closing.
- An annual premium added to your monthly payment.
For FHA loans issued after June 2013, MIP generally lasts for the life of the loan unless you refinance into a different loan type.
USDA Loans
USDA loans are designed for qualifying borrowers in rural and certain suburban areas. They don’t require traditional mortgage insurance but include:
- A one-time guarantee fee (1% of the loan amount)
- An annual fee (0.35% of the balance), added to monthly payments
These fees help fund the USDA program, keeping it affordable for eligible buyers.
VA Loans
For qualified military service members, veterans, and their families, VA loans are one of the best benefits available. They do not require mortgage insurance. Instead, borrowers pay a one-time funding fee that helps sustain the VA home loan program for future veterans.
Alternatives to Paying Mortgage Insurance
If you prefer to avoid traditional mortgage insurance, several strategies can help:
1. Piggyback Loans
Also known as “80/10/10” or “80/15/5” loans, this structure uses a second mortgage or home equity line of credit (HELOC) to cover part of your down payment. This keeps your primary loan at or below the 80% threshold, eliminating PMI requirements.
2. Down Payment Assistance (DPA) Programs
Many state and local housing agencies offer DPA programs that provide grants, forgivable loans, or closing credits to help increase your down payment. If this assistance raises your contribution to 20% or more, you may be able to avoid mortgage insurance entirely.
3. Lender-Paid Mortgage Insurance (LPMI)
Some lenders pay the insurance premium on your behalf upfront, removing the monthly PMI from your payment. The trade-off is a slightly higher interest rate that remains for the life of the loan.
How to Remove Mortgage Insurance from a Conventional Loan
If you currently have PMI, here’s how you can eliminate it:
- Reach 20% Equity: When your loan balance reaches 80% of your home’s original value, you can request PMI cancellation.
- Home Value Increase: If your property’s value rises due to market conditions or home improvements, you may qualify to remove PMI sooner based on updated appraisals.
- Refinance: Refinancing into a new loan where your balance is under 80% of the home’s value can also remove PMI.
The Bottom Line
Mortgage insurance allows lenders to offer flexible financing options to homebuyers who may not have a full 20% down payment—helping more people achieve homeownership sooner.
While it’s an additional cost, mortgage insurance can be a stepping stone toward your first home, your next move, or a long-term investment. A knowledgeable loan officer can help you evaluate whether paying mortgage insurance, increasing your down payment, or exploring alternative loan programs makes the most sense for your financial goals.
This information is for educational purposes only. All loan programs, terms, and interest rates are subject to change without notice. All loans are subject to credit and underwriting approval. Please consult your accountant or tax advisor regarding potential deductions or eligibility requirements.