Do I Need Mortgage Insurance? Loan Type Rules and PMI Removal

Whether you need mortgage insurance depends on two things: the type of loan you get and how much you put down. On a conventional loan, you need private mortgage insurance only if your down payment is less than 20% of the purchase price. FHA and USDA loans require their own mortgage insurance or guarantee fee no matter how much you put down. VA loans skip monthly insurance entirely and charge a one-time funding fee instead. So the honest answer to “do I need mortgage insurance” is: probably yes if you’re putting less than 20% down, but the cost, the duration, and your ability to cancel it later vary sharply by loan program.

Conventional Loans and the 20% Rule

If you take out a conventional mortgage with a down payment below 20%, your lender will require private mortgage insurance (PMI).¹ Lenders look at your loan-to-value (LTV) ratio, which is the loan amount divided by the property’s appraised value. Put $80,000 down on a $400,000 home and your LTV is 80%, so no PMI. Put $20,000 down on that same home and your LTV is 95%, which triggers the insurance requirement.

PMI typically costs between 0.5% and 1.5% of your loan amount per year, and the premium is added to your monthly mortgage payment.² Your exact rate depends on your credit score, down payment size, and lender. Borrowers with higher scores and larger down payments pay closer to the low end. On a $350,000 loan, that works out to roughly $1,750 to $5,250 a year, or about $146 to $437 a month.

FHA Loans Require Insurance No Matter What

FHA loans charge a mortgage insurance premium (MIP) regardless of your down payment. There are two parts: an upfront premium of 1.75% of the loan amount, which is usually rolled into the loan balance, and an annual premium paid monthly. For most 30-year FHA borrowers, the annual premium runs 0.50% to 0.75% depending on loan size and down payment.³

The bigger issue is how long FHA insurance sticks around. If you put down less than 10% on an FHA loan originated after June 3, 2013, the annual MIP stays for the life of the loan. It only goes away when you pay off the mortgage, sell the home, or refinance into a different loan type. Put 10% or more down and MIP drops off after 11 years. For borrowers who can’t reach that 10% threshold, the only realistic way out is to refinance into a conventional loan once you’ve built at least 20% equity, which generally requires a credit score of 620 or higher and a debt-to-income ratio no greater than about 45%.

USDA and VA Loans Charge Fees Instead

USDA guaranteed home loans don’t call it mortgage insurance, but they charge fees that do the same job. The upfront guarantee fee is 1% of the loan amount, and an annual fee of 0.35% of the remaining balance is added to your monthly payment.⁴ The annual fee is low compared to FHA MIP, but it lasts the life of the loan.

VA home loans replace mortgage insurance entirely with a one-time funding fee. For first-time borrowers putting nothing down, the fee is 2.15% of the loan amount. It drops to 1.50% with a 5% down payment and 1.25% with 10% or more down.⁵ Subsequent VA loans carry higher fees, up to 3.30% with no money down.⁶ Once the funding fee is paid, no ongoing monthly insurance charge applies.

Several groups are completely exempt from the VA funding fee. You don’t owe it if you receive VA disability compensation, if you’re eligible for disability compensation but receive retirement or active-duty pay instead, or if you’re a surviving spouse receiving Dependency and Indemnity Compensation. Active-duty service members with a Purple Heart are also exempt if they provide proof on or before the loan closing date.⁵

When PMI Comes Off a Conventional Loan

The Homeowners Protection Act gives conventional borrowers three separate paths to stop paying PMI.⁷ These protections apply to single-family primary residences with mortgages originated on or after July 29, 1999.

Automatic Termination at 78%

Your lender must automatically stop charging PMI when your loan balance is scheduled to reach 78% of the home’s original value based on your initial amortization schedule. “Original value” means the lesser of your purchase price or the appraised value at closing. You don’t have to ask, as long as you’re current on your payments. If you’ve fallen behind when that date arrives, the lender can delay. Once you bring the account current, the insurance must be canceled on the first day of the following month.

Midpoint Cancellation

Even if your loan balance hasn’t reached 78% by the halfway point of your loan term, the lender must cancel PMI at that midpoint if you’re current on payments.⁸ For a 30-year mortgage, that means PMI cannot continue past year 15. This backstop protects borrowers whose loans amortize slowly.

Requesting Cancellation at 80%

You don’t have to wait for automatic termination. You can request cancellation once your balance reaches 80% of the home’s original value, either through scheduled payments or through extra principal reductions.⁹ To qualify, you must:

Submit a written request to your mortgage servicer.
Be current on your mortgage at the time of the request.
Have a good payment history: no payments 30 or more days late in the prior 12 months, and no payments 60 or more days late in the 12 months starting two years before your request.¹⁰
Show that the property value hasn’t declined below the original value, which usually means paying for a new appraisal (typically $300 to $600).
Certify that no second mortgage, home equity loan, or HELOC encumbers your equity.

One catch: this right is based on the home’s original value, not the current market value. If your home has appreciated sharply, you may still need to wait until scheduled payments bring the balance to 80% of what the home was worth at closing. Some lenders allow current-value cancellation under Fannie Mae and Freddie Mac guidelines, but that’s a policy choice, not a legal right.

Ways to Avoid Paying PMI in the First Place

If you can’t put 20% down but want to avoid a separate PMI charge, two structures can help. Both come with trade-offs.

Lender-Paid Mortgage Insurance

With lender-paid mortgage insurance (LPMI), your lender covers the insurance cost in exchange for charging you a higher interest rate, often about a quarter of a percentage point more. There’s no separate PMI line on your monthly statement, but you’re paying for it through the higher rate for the life of the loan. You cannot cancel LPMI the way you can cancel borrower-paid PMI.¹¹ The only way to shed the higher rate is to refinance or pay off the loan.

LPMI can make sense if you plan to sell or refinance within a few years, since the higher rate costs less short-term than separate PMI payments. Over a longer hold, the permanent rate bump usually costs more than borrower-paid PMI you’d eventually cancel.

Piggyback Loans

A piggyback loan, often called an 80/10/10, splits financing into two mortgages. The first covers 80% of the home’s value, a second loan covers 10%, and you put 10% down. Because the primary mortgage sits at exactly 80% LTV, no PMI applies. On a $400,000 home, that’s a $320,000 first mortgage, a $40,000 second mortgage, and a $40,000 down payment. The second mortgage typically carries a higher interest rate than the first, and you’ll manage two loan payments. This structure can also help you avoid jumbo loan requirements by keeping each loan under conforming limits.

A Note on Multi-Unit and Investment Properties

The Homeowners Protection Act’s cancellation and automatic termination rules only apply to single-family homes used as your primary residence. On multi-unit properties (two to four units) or investment properties, the 80% cancellation and 78% automatic termination thresholds don’t apply. Fannie Mae and Freddie Mac guidelines are stricter: borrowers generally cannot request cancellation until the loan balance drops to 70% of the original property value, and these loans are not eligible for automatic termination at all.¹⁰ If you want cancellation based on current appraised value rather than original value, the mortgage must be at least two years old.

1
Consumer Financial Protection Bureau. What Is Private Mortgage Insurance?
2
My Home by Freddie Mac. The Math Behind Putting Down Less Than 20%
3
Office of the Law Revision Counsel. 12 USC 1709 – Insurance of Mortgages
4
USDA Rural Development. Upfront Guarantee Fee and Annual Fee Notes
5
Veterans Affairs. VA Funding Fee and Loan Closing Costs
6
Office of the Law Revision Counsel. 38 USC 3729 – Loan Fee
7
Office of the Law Revision Counsel. 12 USC Chapter 49 – Homeowners Protection
8
Office of the Law Revision Counsel. 12 USC 4902 – Termination of Private Mortgage Insurance
9
Office of the Law Revision Counsel. 12 USC 4902 – Termination of Private Mortgage Insurance
10
Consumer Financial Protection Bureau. Homeowners Protection Act (HPA) – PMI Cancellation Act Procedures
11
National Credit Union Administration. Homeowners Protection Act (PMI Cancellation Act)