Insurance Types and Costs
Mortgage Insurance vs Homeowners Insurance: What Each Covers and What You Actually Pay
Mortgage insurance protects the lender if you stop paying. Homeowners insurance protects you if the house is damaged. Both show up in your monthly payment, but they serve different purposes, cover different risks, and follow different cancellation rules.
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Mortgage Insurance
- Protects: The lender — not you — against financial loss if you default on the mortgage and the home sells for less than the outstanding balance
- Required when: Your down payment is less than 20% on a conventional loan, or on every FHA loan regardless of down payment
- Cost: Conventional PMI ranges from 0.3% to 1.5% of the loan amount annually; FHA MIP is 0.55% annually plus 1.75% upfront
- Action: Calculate the monthly cost of mortgage insurance for your specific loan program before committing to a down payment amount
Homeowners Insurance
- Protects: You and the lender — covers the physical structure, personal property, and liability if someone is injured on your property
- Required when: Always required by the lender as long as you have a mortgage; recommended even after payoff to protect your investment
- Cost: National average is approximately $2,200 per year in 2026, but varies dramatically by state, coverage level, and risk factors
- Action: Shop at least three insurance carriers before closing — the lender does not choose your insurer and quotes vary by $500+ on the same property
Cost Comparison
- PMI on $350K loan: Approximately $88 to $438 per month depending on credit score and LTV — cancellable once equity reaches 20%
- FHA MIP on $350K loan: Approximately $160 per month — permanent on most loans originated with less than 10% down since June 2013
- Homeowners insurance: Approximately $150 to $300+ per month depending on location, coverage, and property characteristics
- Action: Add both insurance types to your PITI calculation before determining what purchase price fits your budget
Cancellation Rules
- Conventional PMI: Automatically cancels at 78% LTV based on original amortization; borrower can request cancellation at 80% LTV
- FHA MIP: Permanent for the life of the loan if LTV exceeded 90% at origination; drops at Year 11 if LTV was 90% or below at origination
- Homeowners insurance: Cannot be cancelled while the lender holds a mortgage — required for the entire loan term, and recommended even after payoff
- Action: Track your LTV and request conventional PMI cancellation as soon as you reach 80% — do not wait for automatic cancellation at 78%
Frequently Asked Questions
Do I need both mortgage insurance and insurance for your mortgage?
Can I cancel mortgage insurance?
Does the VA funding fee count as mortgage insurance?
The Bottom Line Up Front
Mortgage insurance and homeowners insurance are two separate costs that both appear in your monthly payment. Mortgage insurance protects the lender from default risk and can be cancelled once you build enough equity. Homeowners insurance protects your property and is required for the entire life of the loan. Confusing the two leads to budget surprises and missed cancellation opportunities.
First-time buyers commonly lump both costs under “insurance” without understanding that one is temporary (mortgage insurance) and one is permanent (homeowners insurance). This distinction matters for financial planning: the $150-$300 per month you pay in PMI or MIP will eventually go away on a conventional loan once you reach 20% equity, but your homeowners insurance premium is a lifetime cost of owning the home. Understanding both costs from the start ensures your housing budget accounts for the real total.
- Mortgage insurance protects the lender — not the borrower — against loss if the borrower defaults, and is required when equity is below 20% on conventional loans or on all FHA loans
- Homeowners insurance protects the borrower’s property against physical damage, theft, and liability, and is required by every mortgage lender for the life of the loan
- Conventional PMI costs 0.3-1.5% of the loan amount annually and cancels at 80% LTV; FHA MIP costs 0.55% annually and is permanent on most post-2013 loans with less than 10% down
- Homeowners insurance averages approximately $2,200 per year nationally but varies by $1,000+ depending on location, with coastal and disaster-prone areas paying significantly more
What Is Mortgage Insurance and Who Does It Protect?
Mortgage insurance is a premium paid by the borrower that protects the lender against financial loss in the event of default. If you stop paying and the home is sold for less than the outstanding loan balance, the mortgage insurance policy covers the lender’s shortfall. It provides no direct financial benefit to the borrower.
The requirement exists because low-down-payment loans represent higher risk to lenders. A borrower who puts 3.5% down has very little equity cushion — if home values decline even slightly, the loan balance exceeds the property value. Mortgage insurance bridges that risk gap, making lenders willing to approve loans they otherwise would not offer at those LTV levels.
- Conventional PMI is provided by private insurance companies (MGIC, Radian, Essent, Arch, National MI, Genworth) and rates are set based on the borrower’s credit score and LTV
- FHA MIP is provided by the federal government through HUD and carries a flat rate regardless of credit score — 0.55% annually for most borrowers plus 1.75% upfront
- VA loans do not require monthly mortgage insurance but charge a one-time VA funding fee that ranges from 1.25% to 3.3% of the loan amount
- USDA loans charge a 1% upfront guarantee fee and 0.35% annual fee — the lowest mortgage insurance cost among government programs
What Is Homeowners Insurance and Who Does It Protect?
Homeowners insurance is a property insurance policy that covers the physical structure, personal belongings, and liability exposure associated with owning a home. Unlike mortgage insurance, it directly protects you — and also protects the lender’s collateral.
A standard homeowners insurance policy (HO-3 form) covers the dwelling structure, other structures on the property (garage, fence, shed), personal property inside the home, loss of use (temporary housing if the home is uninhabitable), and personal liability for injuries or damage occurring on the property. It does not cover floods, earthquakes, or routine maintenance — those require separate policies or endorsements.
- Lenders require homeowners insurance to protect their collateral — if the home burns down and there is no insurance, the lender loses the property securing the mortgage
- The dwelling coverage amount should equal the estimated rebuild cost of the home, which may differ from the purchase price or appraised value
- Personal property coverage typically covers 50-70% of the dwelling coverage amount, protecting furniture, electronics, clothing, and other belongings inside the home
- Liability coverage (typically $100,000-$300,000) protects against lawsuits if someone is injured on your property — increasing this limit is inexpensive and recommended
Side-by-Side: Mortgage Insurance vs Homeowners Insurance
| Feature | Mortgage Insurance (PMI/MIP) | Homeowners Insurance |
|---|---|---|
| Who it protects | The lender | You and the lender |
| What it covers | Lender’s loss if you default | Property damage, theft, liability |
| When required | Under 20% equity (conventional) or always (FHA) | Always (while mortgage exists) |
| Can you cancel it? | PMI: yes at 80% LTV. MIP: rarely | Not while mortgaged |
| Who sets the rate | PMI: private insurers. MIP: HUD | Private insurers (you choose) |
| Monthly cost range | $88-$438+ (on $350K loan) | $150-$400+ (varies by location) |
| Tax deductible | Not currently deductible (federal) | Not deductible (personal residence) |
| Paid through escrow | Yes | Yes |
Types of Mortgage Insurance: PMI, FHA MIP, and VA Funding Fee
The type of mortgage insurance you pay depends entirely on your loan program. Each has a different cost structure, cancellation policy, and impact on your long-term housing costs.
- Conventional PMI: Monthly premium based on credit score and LTV. A 740+ score at 95% LTV pays approximately 0.3-0.5% annually. A 620 score at the same LTV pays 1.0-1.5%. PMI cancels at 80% LTV by request or 78% automatically.
- FHA MIP: 0.55% annual premium plus 1.75% upfront (financed into the loan). The annual rate is flat regardless of credit score. MIP is permanent on loans with LTV above 90% at origination (June 2013+). On loans with 10%+ down, MIP drops after 11 years.
- VA Funding Fee: One-time fee of 1.25% (10%+ down, first use) to 3.3% (no down, subsequent use). No monthly mortgage insurance. Fee is waived for veterans with 10%+ VA disability rating.
- USDA Guarantee Fee: 1% upfront fee plus 0.35% annual fee. The lowest mortgage insurance cost among all government programs. No cancellation — the annual fee continues for the life of the loan.
Deal Math
On a $350,000 loan, the five-year cost of each mortgage insurance type varies dramatically. Conventional PMI at 0.5% (good credit): $8,750 over five years, then cancellable. FHA MIP at 0.55%: $9,625 over five years, plus $6,125 upfront (financed), and no cancellation. USDA at 0.35%: $6,125 over five years plus $3,500 upfront. VA: $0 monthly (one-time funding fee of $7,525 at first use, zero down). The total five-year cost difference between the cheapest and most expensive option exceeds $10,000.
When Can You Cancel Mortgage Insurance?
Conventional PMI has clear cancellation rules under the Homeowners Protection Act (HPA). FHA MIP has strict rules that make cancellation impractical for most borrowers. VA has no monthly MI to cancel. USDA’s annual fee continues for the life of the loan.
For conventional loans, you can request PMI cancellation when your LTV reaches 80% based on the original property value. The servicer is required to automatically cancel PMI when LTV reaches 78% based on the original amortization schedule. If your home has appreciated, you can request early cancellation by providing a new appraisal showing the current LTV is below 80% — but the rules for appraisal-based cancellation vary by servicer and investor.
- Borrower-requested cancellation at 80% LTV requires a written request to the servicer, a good payment history (no late payments in the past 12 months), and no subordinate liens
- Automatic cancellation at 78% LTV happens without borrower action based on the original amortization schedule — not based on current market value or extra payments
- If you have made extra payments that brought your balance below 80% LTV ahead of the amortization schedule, you can request early cancellation with documentation of the current balance
- FHA MIP cancellation is only possible on loans originated before June 3, 2013, or on post-2013 loans where the original LTV was 90% or below (MIP drops at Year 11 in that case)
How Much Does Each One Cost? Real Dollar Examples
Abstract percentages are hard to budget around. Here is what mortgage insurance and homeowners insurance actually cost in monthly dollars on a $350,000 mortgage in 2026.
| Insurance Type | Annual Rate | Monthly Cost (on $350K loan) | Cancellable? |
|---|---|---|---|
| Conventional PMI (740+ credit, 5% down) | ~0.4% | ~$117 | Yes, at 80% LTV |
| Conventional PMI (660 credit, 5% down) | ~1.1% | ~$321 | Yes, at 80% LTV |
| FHA MIP | 0.55% | ~$160 | No (most loans) |
| USDA Guarantee Fee | 0.35% | ~$102 | No |
| VA (no monthly MI) | 0% | $0 | N/A |
| Homeowners Insurance (national avg) | ~$2,200/yr | ~$183 | No (while mortgaged) |
| Homeowners Insurance (FL/TX/LA) | ~$3,500-$5,000/yr | ~$292-$417 | No (while mortgaged) |
Do You Still Need Homeowners Insurance After Paying Off Your Mortgage?
Your lender no longer requires it once the mortgage is paid off, but cancelling homeowners insurance after payoff is one of the worst financial decisions a homeowner can make. The home is likely your largest asset, and insuring it costs a fraction of the replacement value.
Without homeowners insurance, a fire, severe storm, or liability lawsuit could result in a total financial loss with no recovery. The annual premium — $2,000-$5,000 for most homes — is a small price relative to the $200,000-$500,000+ replacement cost of the structure and contents. The only difference after payoff is that you pay the premium directly instead of through escrow.
- After payoff, you have the option to adjust coverage levels, increase deductibles, or change carriers without lender restrictions — use this flexibility to optimize your premium
- Liability coverage remains essential regardless of mortgage status — a lawsuit from a visitor’s injury on your property can exceed $100,000 in medical and legal costs
- If you own the home free and clear and it is destroyed by an uninsured event, you lose the full value of the property with no recovery — mortgage-free homeowners arguably need insurance more, not less
- Many homeowners switch to a policy with a higher deductible after payoff to lower the premium, accepting more risk per-incident in exchange for lower annual costs
The Bottom Line
Mortgage insurance and homeowners insurance both show up in your monthly payment, but they protect different parties, cover different risks, and follow different rules. Mortgage insurance is a temporary cost that disappears when you build equity (on conventional) or never goes away (on FHA). Homeowners insurance is a permanent cost of protecting your largest asset.
When budgeting for homeownership, include both insurance costs in your PITI calculation from the start. Shop homeowners insurance aggressively — three to five quotes on the same property can save hundreds per year. Track your equity and request PMI cancellation the moment you reach 80% LTV on a conventional loan. And if you are choosing between FHA and conventional, factor the permanent nature of FHA MIP into your total five-year cost comparison.
Frequently Asked Questions
Can I deduct mortgage insurance on my taxes?
The federal mortgage insurance deduction has expired and been reinstated several times. As of the 2025 tax year, it is not currently deductible at the federal level. Check IRS guidance annually, as Congress occasionally reinstates the deduction retroactively. State deductions vary. Homeowners insurance premiums are not deductible for personal residences at the federal level.
Does my credit score affect homeowners insurance rates?
In most states, yes. Insurance companies use credit-based insurance scores (different from FICO mortgage scores) as one factor in setting premiums. Borrowers with lower credit scores may pay higher homeowners insurance premiums. California, Hawaii, Maryland, and Massachusetts restrict or prohibit the use of credit in insurance pricing.
Can I choose my own PMI company?
Typically, no. The lender selects the PMI company for borrower-paid monthly PMI. However, you can sometimes choose between borrower-paid monthly PMI, borrower-paid single-premium PMI (paid upfront at closing), or lender-paid PMI (built into the interest rate). Ask your lender to compare all three options and show you the total cost of each over your expected ownership period.
What happens if I do not have homeowners insurance?
If your homeowners insurance lapses while you have a mortgage, the lender will purchase force-placed insurance on your behalf and charge you for it. Force-placed insurance is significantly more expensive than standard coverage — often two to three times the normal premium — and provides only structural coverage with no personal property or liability protection. Always maintain your own policy to avoid this scenario.
Is flood insurance included in homeowners insurance?
No. Standard homeowners insurance policies specifically exclude flood damage. If your property is in a FEMA-designated flood zone, the lender will require a separate flood insurance policy through the National Flood Insurance Program (NFIP) or a private flood insurer. The cost of flood insurance is added to your escrow payment on top of your homeowners insurance premium.
How do I lower my monthly insurance costs?
For homeowners insurance: shop multiple carriers, increase your deductible (from $1,000 to $2,500 can save 10-15%), bundle with auto insurance, and ask about discounts for security systems, new roofs, and impact-resistant features. For mortgage insurance: improve your credit score before closing (a 740+ score significantly reduces PMI rates), put more down if possible (even 10% instead of 5% reduces PMI), and request cancellation as soon as you reach 80% LTV.