Mortgage Insurance Explained: PMI, MIP & How to Avoid It
Everything you need to know about private mortgage insurance (PMI) and FHA mortgage insurance premium (MIP)—when it is required, what it costs, and proven strategies to avoid or remove it.
Expert guidance from Jimmy Joseph MBA | NMLS #1577754
What is Mortgage Insurance?
Mortgage insurance (MI) is a policy that protects the lender—not you—if you default on your mortgage loan. It's typically required when you make a down payment of less than 20% of the home's purchase price, because loans with higher loan-to-value (LTV) ratios carry more risk for lenders.
Think of it this way: If you only put down 5% ($30,000 on a $600,000 Bergen County home), the lender is financing 95% ($570,000). If you default early in the loan, the lender might not recover their full investment when selling the foreclosed property. Mortgage insurance protects them against this loss.
While it adds to your monthly payment, mortgage insurance makes homeownership accessible to buyers who don't have 20% saved for a down payment. Without it, lenders would require larger down payments, making it much harder to buy a home—especially in high-cost areas like Bergen County.
Key Point: MI Protects the Lender, Not You
Mortgage insurance does NOT protect you from foreclosure or cover your payments if you lose your job. It only protects the lender's investment. For your own protection, consider separate life insurance, disability insurance, or mortgage protection insurance.
PMI vs MIP: Understanding the Difference
The type of mortgage insurance you pay depends on your loan type. Here's how they compare:
| Feature | PMI (Conventional) | MIP (FHA) |
|---|---|---|
| Loan type | Conventional loans | FHA loans only |
| When required | LTV > 80% (< 20% down) | All FHA loans regardless of down payment |
| Typical cost | 0.5% - 1.5% annually | 0.55% annual + 1.75% upfront |
| Can be removed? | Yes, at 20% equity | Only if >10% down OR refinance |
| Duration | Until 20-22% equity | Life of loan (<10% down) or 11 years (≥10% down) |
PMI (Private Mortgage Insurance)
- For conventional loans with <20% down
- Cancellable at 20% equity
- Automatic removal at 22% equity
- Lower rates with higher credit scores
MIP (Mortgage Insurance Premium)
- Required on all FHA loans
- 1.75% upfront (can be financed)
- 0.55% annual premium (monthly payment)
- For life of loan if <10% down
When is PMI Required?
PMI is required on conventional loans whenever your loan-to-value (LTV) ratio exceeds 80%. In other words, if your down payment is less than 20% of the home's purchase price, you'll pay PMI.
Loan-to-Value (LTV) Calculation
Formula: LTV = (Loan Amount ÷ Home Value) × 100
Example 1: Bergen County $600K Home
Down payment: $60,000 (10%)
Loan amount: $540,000
LTV: ($540,000 ÷ $600,000) × 100 = 90% LTV
✗ PMI Required (LTV > 80%)
Example 2: Same Home with 20% Down
Down payment: $120,000 (20%)
Loan amount: $480,000
LTV: ($480,000 ÷ $600,000) × 100 = 80% LTV
✓ No PMI Required (LTV ≤ 80%)
PMI Thresholds by Down Payment
- 3-5% down: PMI required (95-97% LTV) - Highest PMI rates
- 10% down: PMI required (90% LTV) - Moderate PMI rates
- 15% down: PMI required (85% LTV) - Lower PMI rates
- 20% down: No PMI required (80% LTV) - Sweet spot!
How Much Does PMI Cost?
PMI typically costs between 0.5% and 1.5% of your loan amount annually, paid in monthly installments. The exact rate depends on your credit score, down payment size, and loan type.
PMI Rate Factors
Credit Score Impact:
- • 760+ credit: 0.5% - 0.8% PMI rate
- • 700-759 credit: 0.7% - 1.0% PMI rate
- • 680-699 credit: 0.9% - 1.2% PMI rate
- • 620-679 credit: 1.2% - 1.5% PMI rate
Down Payment Impact:
- • 3-5% down (95-97% LTV): Highest PMI rates
- • 10% down (90% LTV): Moderate PMI rates
- • 15% down (85% LTV): Lower PMI rates
Bergen County PMI Cost Examples
$600K Home, 10% Down
Loan amount: $540,000
Credit score: 720
PMI rate: 0.85% annually
Annual PMI: $4,590
Monthly PMI: $382.50
$500K Home, 5% Down
Loan amount: $475,000
Credit score: 680
PMI rate: 1.15% annually
Annual PMI: $5,462
Monthly PMI: $455.17
Total Cost Over Time: On a $500K loan at $400/month PMI for 5 years until reaching 20% equity, you'd pay $24,000 total in PMI. This is why strategies to avoid or remove PMI can save thousands.
5 Ways to Avoid PMI
Make a 20% Down Payment
The most straightforward way to avoid PMI is putting down 20% or more. On a $600K Bergen County home, that's $120K down payment—no PMI required.
Pros: No PMI, lower monthly payment, more equity from day one
Cons: Requires significant cash reserves, delays homeownership for some buyers
80-10-10 Piggyback Loan
Take out two loans simultaneously: an 80% LTV first mortgage (no PMI) + a 10% second mortgage + 10% down payment. Common structure: 80-10-10 or 80-15-5.
Example: $600K home → $480K first mortgage (80%) + $60K second mortgage (10%) + $60K down (10%)
Pros: No PMI, tax-deductible interest on both loans
Cons: Second mortgage has higher interest rate (typically 2-4% above first mortgage), two monthly payments
Lender-Paid Mortgage Insurance (LPMI)
The lender pays your PMI upfront in exchange for a slightly higher interest rate (typically 0.25%-0.50% higher). You avoid monthly PMI payments.
Example: 6.5% rate with PMI vs 6.75% rate with LPMI (no separate PMI payment)
Pros: No monthly PMI payment, can't be removed later (locked in for life of loan)
Cons: Higher interest rate for entire loan unless you refinance, may cost more long-term
VA Loan (No PMI Ever)
If you're a veteran, active-duty service member, or eligible spouse, VA loans allow 0% down with no PMI—ever. You pay a one-time VA funding fee instead (2.3% first-time, 3.6% subsequent use, waived for disabled veterans).
Example: $600K Bergen County home, $0 down, no PMI, just 2.3% funding fee ($13,800, can be financed)
Learn more about VA loans →Single-Premium PMI (Upfront Payment)
Pay your entire PMI amount upfront at closing (either cash or rolled into loan). No monthly PMI payments for the life of the loan.
Example: $540K loan might require $8,000-12,000 single-premium PMI at closing instead of $380/month
Pros: Lower monthly payment, can be more cost-effective if you keep loan long-term
Cons: Non-refundable if you refinance or sell early, large upfront cost
How to Remove PMI
If you're already paying PMI, here's how to get rid of it and save hundreds per month:
Request Cancellation at 20% Equity
Once your loan balance reaches 80% LTV (20% equity through payments or appreciation), you can request PMI cancellation. Requirements:
- • Current on payments (no 30-day lates in past year)
- • Written request to lender
- • May require new appraisal ($400-600 cost) to prove current value
- • Property in good condition (no structural issues)
Bergen County Appreciation Example: Bought home for $600K with 10% down in 2020. Home now worth $700K in 2025. Original loan: $540K. Current balance: $520K. New LTV: $520K ÷ $700K = 74% LTV. You can request PMI removal!
Automatic Cancellation at 22% Equity
By law, your lender must automatically cancel PMI when your loan balance reaches 78% of the original home value (22% equity)—as long as you're current on payments. This happens through normal amortization, regardless of current home value.
Example: $600K original purchase → PMI automatically cancels when balance reaches $468K (78% of $600K), typically 8-11 years into a 30-year mortgage at 10% down.
Refinance to Eliminate PMI
If your home has appreciated significantly or you've paid down enough principal, refinancing into a new loan at 80% LTV or below removes PMI. Most effective when:
- • Home value increased substantially (common in Bergen County 2020-2024)
- • Current rates are similar or lower than your existing rate
- • Closing costs are offset by PMI savings within 2-3 years
Refinance Math Example:
Current: $540K loan + $380/month PMI. Home appreciated from $600K to $700K. Refinance to $540K at 77% LTV (no PMI). Save $380/month = $4,560/year. Closing costs $8,000. Break-even in 21 months.
Make Extra Principal Payments
Accelerate reaching 20% equity by making extra principal payments. Every dollar above your required payment goes directly to principal.
Strategy: Pay an extra $500-1,000/month toward principal. On a $540K loan at 6.5%, adding $800/month could reach 20% equity in ~4 years instead of 8-10 years, saving thousands in PMI.
Important PMI Removal Deadline
Even if you don't request cancellation, PMI must be removed by law when you reach the midpoint of your loan term (15 years on a 30-year mortgage) as long as you're current on payments. Don't wait—request removal as soon as you hit 20% equity to save immediately.
FHA Mortgage Insurance (MIP) Explained
FHA loans require mortgage insurance premium (MIP) regardless of down payment size. Unlike PMI on conventional loans, FHA MIP has both upfront and annual components:
Upfront MIP (UFMIP)
- • 1.75% of loan amount
- • Charged at closing
- • Can be rolled into loan (most borrowers do this)
- • One-time fee
Example: $500K FHA loan → $8,750 UFMIP (typically added to loan balance, not paid out-of-pocket)
Annual MIP
- • 0.55% of loan amount annually
- • Paid monthly (÷ 12)
- • For life of loan if <10% down
- • For 11 years if ≥10% down
Example: $500K loan → $2,750/year ÷ 12 = $229/month MIP
FHA MIP Duration Rules
MIP for LIFE of loan
Only removable by refinancing to conventional loan once you have 20% equity
MIP for 11 years
Automatically cancels after 11 years of payments
How to Remove FHA MIP
The Only Way to Remove FHA MIP (if <10% down): Refinance to a conventional loan once you reach 20% equity.
Refinance Strategy: Wait until your home appreciates or you pay down enough principal to reach 80% LTV. Then refinance to conventional—no more MIP. On a $500K loan, eliminating $229/month MIP saves $2,748/year.
VA Loans: No PMI or MIP Ever
If you're a veteran, active-duty service member, National Guard/Reserve member, or eligible surviving spouse, VA loans offer the best deal when it comes to mortgage insurance: there is none.
VA Loan Benefits
- 0% down payment option (100% financing)
- No PMI or MIP ever—regardless of down payment
- Competitive interest rates (often 0.25-0.50% below conventional)
- More lenient credit requirements (580+ often acceptable)
- No prepayment penalty
VA Funding Fee (Not Insurance)
Instead of mortgage insurance, VA loans charge a one-time funding fee:
- • First-time use, 0% down: 2.3% of loan amount
- • First-time use, 5% down: 1.65% of loan amount
- • First-time use, 10%+ down: 1.4% of loan amount
- • Subsequent use: 3.6% of loan amount
- • Disabled veterans: Waived (0%)
The funding fee can be rolled into the loan and is a ONE-TIME charge—not an ongoing monthly payment like PMI/MIP.
VA vs Conventional: PMI Savings Example
Scenario: $600K Bergen County home purchase
Conventional (5% down, PMI):
$30K down, $570K loan, $450/month PMI = $5,400/year
VA Loan (0% down, no PMI):
$0 down, $600K loan, $13,800 funding fee (financed), $0/month PMI
VA Loan Savings: $5,400/year in avoided PMI. Funding fee paid off over 30 years = $46/month vs $450/month PMI.
Need Help with Mortgage Insurance Decisions?
Get personalized guidance on PMI, MIP, and strategies to save thousands. Free consultation for Bergen County homebuyers.
Expert guidance from Jimmy Joseph MBA | NMLS #1577754
Avoid or Remove PMI - Save Thousands
Whether you're buying a home or already paying PMI, we'll show you proven strategies to save. Get expert advice from Jimmy Joseph MBA at CMG Home Loans.
NMLS #1577754 | Branch NMLS #2477715
Licensed Mortgage Loan Originator serving Bergen County, NJ