# Mortgage Insurance: What It Is, How It Works, Types

![A man and a woman sit on a couch with a dog in a new house with boxes around them](https://www.investopedia.com/thmb/xtEhH4Re20t79cR2XvtrPxNhzDI=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/mortgageinsurance-78539aa87b484eadb9bc44aa2d78389e.jpg)

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> **Definition**
>
> Mortgage insurance is an insurance policy that protects a lender or titleholder against financial loss if the borrower defaults on payments or cannot meet mortgage obligations.

## What Is Mortgage Insurance?

Mortgage insurance is an insurance policy that protects a [mortgage lender](https://www.investopedia.com/mortgage/mortgage-guide/mortgage-lenders/) or titleholder if the borrower defaults on payments, passes away, or is otherwise unable to meet the contractual obligations of the mortgage.

Mortgage insurance can refer to [private mortgage insurance (PMI)](https://www.investopedia.com/mortgage/insurance/), qualified mortgage insurance premium (MIP) insurance, or mortgage title insurance. What these have in common is an obligation to make [the lender](https://www.investopedia.com/the-best-mortgage-lenders-11714101) or property holder whole in the event of specific cases of loss.

Mortgage [life insurance](https://www.investopedia.com/the-best-life-insurance-companies-8763666), on the other hand, sounds similar but is designed to protect heirs if the borrower dies while owing mortgage payments. It may pay off either the lender or the heirs, depending on the terms of the policy.

### Key Takeaways

*   Mortgage insurance refers to an insurance policy that protects a lender or titleholder if the borrower defaults on payments, passes away, or is otherwise unable to meet the contractual obligations of the mortgage.
*   Three types of mortgage insurance include private mortgage insurance, qualified mortgage insurance premium (MIP) insurance, and mortgage title insurance.
*   It shouldn't be confused with mortgage [life insurance](https://www.investopedia.com/the-best-life-insurance-for-people-over-50-8765923), which pertains to protecting heirs if the borrower dies while owing mortgage payments.

## How Mortgage Insurance Works

Mortgage insurance may come with a typical monthly premium payment or be capitalized into a lump-sum payment at the time of mortgage origination. The type of mortgage insurance you need can depend on various factors, including the type of mortgage and the size of your [down payment](https://www.investopedia.com/personal-finance/how-long-should-it-take-save-down-payment/).

Here are three types of mortgage insurance:

### Private Mortgage Insurance (PMI)

Private mortgage insurance (PMI) is a type of mortgage insurance that mortgage lenders may require borrowers to purchase if they make a [small down payment](https://www.investopedia.com/using-retirement-savings-for-down-payment-11700255). Like other kinds of mortgage insurance, PMI protects the lender, not the borrower. The lender arranges PMI, and private insurance companies issue the policy.  

Mortgage lenders typically lend an amount that equals 80% of the property's selling price—called the [loan-to-value (LTV) ratio](https://www.investopedia.com/terms/l/loantovalue.asp). As a result, the [homebuyer](https://www.investopedia.com/best-real-estate-apps-11725126) must come up with a 20% [down payment](https://www.investopedia.com/higher-housing-prices-turning-into-larger-down-payments-11707819) due at the [loan closing](https://www.investopedia.com/mortgage/mortgage-guide/closing-costs/).

Borrowers who make a down payment of less than 20% must pay PMI to protect [the lender](https://www.investopedia.com/the-best-mortgage-lenders-for-bad-credit-11697459). A lender might also require PMI if a borrower is refinancing with a [conventional loan](https://www.investopedia.com/terms/c/conventionalmortgage.asp) and equity is less than 20% of the home's value.

The borrower can request the cancellation of private mortgage insurance once the [loan](https://www.investopedia.com/the-best-heloc-loans-11695646) balance equals 80% of the original home's value at the time you purchased it.  

### Qualified Mortgage Insurance Premium (MIP)

When you get a [United States Federal Housing Administration (FHA)](https://www.investopedia.com/terms/f/fhaloan.asp)\-backed mortgage, you must pay a [qualified mortgage insurance premium (MIP)](https://www.investopedia.com/mortgage/insurance/qualified-insurance-premium/), which provides similar insurance to PMI.

Typically, the borrower must pay a monthly insurance premium plus an [upfront mortgage insurance premium (UFMIP)](https://www.investopedia.com/terms/u/up-front-mortgage-insurance-ufmi.asp) of 1.75% of the loan amount due at the loan closing. However, the borrower can embed the upfront premium into the loan balance, paying for it via the [monthly payments](https://www.investopedia.com/mortgage/mortgage-rates/payment-structure/).

A mortgage insurance premium has different rules, including that everyone with an [FHA mortgage](https://www.investopedia.com/ask/answers/082616/whats-difference-between-fha-and-conventional-loans.asp) must buy this type of insurance, regardless of the size of their down payment.

### Mortgage Title Insurance

Mortgage [title insurance](https://www.investopedia.com/terms/t/title_insurance.asp) protects against loss if a sale is later invalidated because of a problem with the title. Mortgage title insurance protects a beneficiary against losses if it is determined at the time of the sale that someone other than the seller owns the property.

Before mortgage closing, a representative, such as a lawyer or a title company employee, performs a [title search](https://www.investopedia.com/terms/t/titlesearch.asp). The process is designed to uncover any liens placed on [the property](https://www.investopedia.com/the-best-real-estate-websites-11721331) that would prevent the owner from selling. A title search also verifies that the real estate being sold belongs to the seller. Despite a thorough search, important pieces of evidence can get missed when information is not centralized.

## Mortgage Protection Life Insurance

As a borrower, a financial representative may offer mortgage protection [life insurance](https://www.investopedia.com/do-i-need-life-insurance-how-to-decide-11729298) when you [apply for a mortgage](https://www.investopedia.com/terms/g/graduatedpaymentmortgage.asp). You can decline this [insurance](https://www.investopedia.com/the-best-universal-life-insurance-8762927), but the bank may require you to sign some forms and waivers verifying your decision and that you understand the risks associated with having a mortgage.

Payouts for mortgage [life insurance](https://www.investopedia.com/the-best-term-life-insurance-8764257) can be either declining-term (the payout drops as the mortgage balance drops) or level, although the latter costs more. The recipient of the payments can be either the [lender](https://www.investopedia.com/the-best-va-loan-lenders-11697437) or the heirs of the borrower, depending on the terms of [the policy](https://www.investopedia.com/the-best-whole-life-insurance-8763569).

## How Long Do I Need to Pay Mortgage Insurance?

If you have a [conventional loan](https://www.investopedia.com/ask/answers/082616/whats-difference-between-fha-and-conventional-loans.asp), you'll generally need to pay mortgage insurance until you have at least 20% equity in the home. If you have an FHA loan, you'll have to pay mortgage insurance premiums (MIP), but the time frame varies depending on a few factors, including the [type of loan](https://www.investopedia.com/mortgage/heloc/) and the size of your [down payment](https://www.investopedia.com/mortgage/no-down-payment-mortgage/).

## What Does Mortgage Insurance Cover?

Mortgage insurance usually benefits the lender, not you. However, it may help convince a lender to approve you for a mortgage loan with a smaller [down payment](https://www.investopedia.com/ask/answers/100215/can-i-borrow-my-annuity-put-down-payment-house.asp) of less than 20% of the purchase price.

Mortgage insurance protects your mortgage company from loss if you default on your payments but won't protect you from losing your house due to foreclosure.

## How Can I Avoid Paying Mortgage Insurance?

If you don't want to pay private mortgage insurance when financing the purchase of a new home, you'll need to put down at least 20%. However, some lenders allow you to avoid PMI by choosing a [mortgage loan](https://www.investopedia.com/articles/pf/05/payoffmortgage.asp) with a higher [interest rate](https://www.investopedia.com/mortgage-rates-5094943) that compensates the lender for the additional risk. Other loans, such as FHA loans, require MIPs regardless of the equity you hold in the home.

## The Bottom Line

Mortgage insurance protects the lender if you cannot meet your mortgage obligations. Lenders require you to pay for private mortgage insurance if you put down less than 20% on a conventional loan, but you can request to drop the insurance once you have sufficient equity.

Depending on the type of government-backed FHA loan, you may pay a mortgage insurance premium for 11 years or the life of the loan.

> **Article Sources**
>
> 1.  Consumer Financial Protection Bureau. "[What Is Private Mortgage Insurance?](https://www.consumerfinance.gov/ask-cfpb/what-is-private-mortgage-insurance-en-122/)"
>     
> 2.  Consumer Financial Protection Bureau. "[When Can I Remove Private Mortgage Insurance (PMI) From My Loan?](https://www.consumerfinance.gov/ask-cfpb/when-can-i-remove-private-mortgage-insurance-pmi-from-my-loan-en-202/)"
>     
> 3.  FHA.com. "[FHA Mortgage Insurance Requirements](https://www.fha.com/fha_requirements_mortgage_insurance)."
>     
> 4.  U.S. Department of Housing and Urban Development. "[Single Family Upfront Mortgage Insurance Premium (MIP)](https://www.hud.gov/program_offices/housing/comp/premiums/ufmain)."
>     
> 5.  Consumer Financial Protection Bureau. "[What Is Lender’s Title Insurance?](https://www.consumerfinance.gov/ask-cfpb/what-is-lenders-title-insurance-en-163/)"
>     
> 6.  FHA.com. "[FHA Loans and Mortgage Insurance Requirements](https://www.fha.com/fha_article?id=1373)."
>     
> 7.  U.S. Department of Housing and Urban Development. "[Discontinuing Monthly Mortgage Insurance Premium Payments](https://www.hud.gov/program_offices/housing/comp/premiums/prem2001)."