Mortgage insurance is one of the most common (and most misunderstood) parts of buying a home—especially for buyers putting less than 20% down.
Depending on your loan type, mortgage insurance can look very different. Let’s break down how it works for FHA vs. Conventional loans so you know what to expect.
What Is Mortgage Insurance?
Mortgage insurance is a cost that protects the lender (not the borrower) in case the loan goes into default. It’s typically required when a buyer puts down less than 20% and allows more people to become homeowners with lower upfront costs.
FHA Mortgage Insurance (MIP)
FHA loans include Mortgage Insurance Premium (MIP), which has two parts:
- Upfront MIP
- A one-time cost (usually 1.75% of the loan amount)
- Often rolled into the loan
- Monthly MIP
- Paid as part of your monthly mortgage payment
The key thing to know: In most cases, FHA mortgage insurance stays for the life of the loan (unless you refinance).
Conventional Mortgage Insurance (PMI)
Conventional loans use Private Mortgage Insurance (PMI) when putting less than 20% down.
The biggest difference:
PMI is not permanent
- It can be removed once you reach ~20% equity in your home
- Or sometimes even earlier based on appreciation
PMI costs also vary based on:
- Credit score
- Down payment
- Loan type
Key Differences
- FHA (MIP)
- Includes upfront + monthly insurance
- Typically stays for the life of the loan
- Less impacted by credit score
- Conventional (PMI)
- Monthly only (no large upfront fee)
- Can be removed over time
- Strongly influenced by credit score
Which Is Better?
There’s no one-size-fits-all answer.
- FHA may be a better option for buyers with lower credit scores or smaller down payments
- Conventional may be more cost-effective long-term for buyers with strong credit and higher down payments
The Bottom Line
Mortgage insurance isn’t necessarily a bad thing—it’s what makes homeownership possible for many buyers without needing 20% down. The key is understanding how it works for each loan type so you can choose the option that makes the most sense for your financial goals.
If you’re not sure which loan option is right for you, we’re always here to walk you through the numbers and help you compare!