Mortgage Insurance, Explained

Mortgage insurance has a bad reputation. Nobody loves paying for a policy that protects the lender, not them. But it's the reason most people can buy a home without saving for a decade first.

Here's what it does. When your down payment is on the smaller side, the lender is taking more risk, and mortgage insurance covers some of that risk. You pay for it as part of your payment. In exchange, you get into a home years earlier, and you can look in more neighborhoods with the same savings.

It works differently by loan type

• 1
  Conventional loans (PMI). Usually a monthly charge. The good news: it can typically come off once you've built enough equity, through your payments or your home's value going up. The lender has rules for how that works.
• 2
  FHA loans (MIP). An upfront premium that's usually added to the loan, plus a monthly premium. FHA mortgage insurance tends to stay much longer, often for the life of the loan, so the usual way out is refinancing later.
• 3
  VA loans. No monthly mortgage insurance. Instead there's a one-time funding fee, which can be added to the loan, and some veterans are exempt from it.