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Mortgage Insurance Types Compared (PMI, MIP, VA Funding Fee)

Mortgage insurance protects lenders against borrower default and comes in several forms depending on the loan program: private mortgage insurance (PMI) on conventional loans with less than 20% down, FHA mortgage insurance premiums (upfront and annual MIP) on FHA loans, and the VA funding fee on VA loans. Each type has different cost structures, payment methods, and cancellation rules that significantly affect total loan cost.

Key Takeaways

  • PMI on conventional loans is risk-based (priced by credit score and LTV) and can be cancelled when the LTV reaches 80% through principal paydown or property appreciation.
  • FHA MIP includes a 1.75% upfront premium (typically financed) plus an Under FHA's current MIP schedule, loans with terms exceeding 15 years and an initial LTV above 95% carry an annual premium of 0.55% of the outstanding balance for the life of the loan, as established by HUD Mortgagee Letter 2013-04 and the current rate schedule in Mortgagee Letter 2023-05..
  • VA loans have no monthly mortgage insurance; instead, a one-time funding fee of 1.25%-3.30% is charged based on down payment and usage history, and certain disabled veterans are exempt.
  • USDA loans charge a 1.00% upfront guarantee fee and 0.35% annual fee for the life of the loan, generally lower than FHA costs.
  • PMI cancellation provisions make conventional loans less expensive over the long term for borrowers who reach 80% LTV within a few years.
  • FHA MIP's life-of-loan duration is the primary reason many borrowers refinance from FHA to conventional once they have 20% equity and qualifying credit.
  • Lender-paid PMI (LPMI) eliminates monthly MI payments but results in a permanently higher interest rate that cannot be cancelled like borrower-paid PMI.
  • Total mortgage insurance cost should be compared across programs over the expected holding period, not just as a monthly payment snapshot.

How It Works

How PMI Premium Calculations Work

PMI premiums are determined by the private mortgage insurer using proprietary rate cards that factor in the borrower’s representative credit score, the loan-to-value ratio, the required coverage percentage (set by Fannie Mae or Freddie Mac based on LTV), and the loan term. Coverage percentages typically range from 6% at 85% LTV to 35% at 97% LTV, though exact requirements vary by LTV band and are set by the GSE purchasing the loan.

The insurer publishes rate cards that show the annual premium as a percentage of the original loan amount for each credit score and LTV combination. For example, a 740-score borrower at 90% LTV with 25% coverage might pay 0.32% annually, while a 680-score borrower at 95% LTV with 35% coverage might pay 0.95% annually. The lender or borrower obtains quotes from multiple PMI providers to find the most competitive rate, as pricing varies meaningfully between insurers .

Monthly PMI is calculated by multiplying the annual rate by the original loan amount and dividing by 12. Single-premium PMI is a one-time payment calculated using a different rate factor that reflects the present value of the expected premium stream. The single-premium option can be advantageous for borrowers who have the cash available and expect to keep the loan long enough to recoup the upfront cost through lower monthly payments.

How FHA MIP Is Applied and Collected

The upfront MIP of 1.75% is calculated on the base loan amount (before the UFMIP is added) and is typically financed by adding it to the loan. The annual MIP is calculated each month based on the outstanding loan balance and the applicable annual rate. As the balance declines through amortization, the monthly MIP amount decreases slightly each month, though the effect is gradual on a 30-year amortization schedule.

For FHA-to-FHA refinances (streamline refinances), Borrowers who refinance an FHA loan into a new FHA loan within 36 months of the original closing may receive a partial refund of the upfront MIP, with the refund percentage declining each month per HUD Handbook 4000.1's UFMIP refund schedule.. The refund is credited against the new UFMIP, reducing the net upfront cost. This provision is specific to FHA streamline refinances and The UFMIP refund is available exclusively for FHA-to-FHA refinances and follows a declining schedule over 36 months, as specified in HUD Handbook 4000.1. Borrowers refinancing from an FHA loan to a conventional loan are not eligible for any UFMIP refund .

How the VA Funding Fee Is Determined

The VA funding fee is determined by a matrix published by the VA that considers three variables: the type of transaction (purchase, cash-out refinance, or Interest Rate Reduction Refinance Loan), the down payment percentage, and whether the veteran is a first-time or subsequent user of the VA loan benefit. Subsequent use means the veteran has previously used a VA loan that has been paid off or the entitlement has been restored.

The funding fee is calculated as a percentage of the loan amount. For a first-time use purchase with no down payment and a $350,000 loan, the funding fee would be $7,525 (2.15%). If financed, the total loan becomes $357,525. The monthly payment increases by approximately $40-$45 compared to the same loan without the fee, but there is no ongoing monthly mortgage insurance premium, which typically results in a lower total monthly cost compared to FHA MIP or PMI at similar LTV ratios.

Veterans receiving VA disability compensation at any percentage are fully exempt from the funding fee. This exemption represents one of the most significant financial benefits available to disabled veterans and can save thousands of dollars on a single transaction. Veterans who receive a disability rating after closing may be eligible for a retroactive refund of the funding fee .

How to Cancel PMI

Under the Homeowners Protection Act, borrowers have several paths to PMI cancellation. Borrower-requested cancellation requires that the LTV reach 80% based on either the original property value or a current appraisal (if permitted by the servicer and investor). The borrower must be current on payments, have a good payment history, and certify that no subordinate liens exist on the property. Automatic termination occurs when the LTV reaches 78% based on the original amortization schedule (not accelerated payments or appreciation). Final termination occurs at the midpoint of the loan term regardless of LTV.

For cancellation based on appreciation (a new appraisal showing the home value has increased enough to bring LTV below 80%), the requirements are more restrictive. Fannie Mae requires a minimum of two years of seasoning before a new appraisal can be used and requires the LTV to be at or below 75% (not 80%) for loans seasoned between two and five years .

Related topics include homeowners insurance requirements for mortgage approval, dti ratio limits by loan type, front-end vs. back-end dti ratios explained, escrow accounts explained: insurance and tax payments, and strategies for reducing dti before applying for a mortgage.

Key Factors

Factors relevant to Mortgage Insurance Types Compared (PMI, MIP, VA Funding Fee)
Factor Description Typical Range
Cost Structure The way mortgage insurance premiums are calculated and charged varies by loan type. Conventional PMI is based on credit score and LTV, FHA MIP uses a flat table rate regardless of credit, and the VA funding fee is a one-time charge based on service category and down payment amount. PMI: 0.2%-2.0% annually; FHA MIP: 0.55% annual + 1.75% upfront; VA funding fee: 1.25%-3.3% one-time
Cancellation Rules Rules for when mortgage insurance can be removed differ significantly by loan type. Conventional PMI can be cancelled at 78-80% LTV, FHA MIP on loans after 6/2013 is permanent for 30-year terms with less than 10% down, and the VA funding fee has no ongoing component to cancel. PMI: auto-cancel at 78% LTV; FHA MIP: life of loan (if <10% down, 30yr term); VA: no ongoing MI
Credit Score Sensitivity Conventional PMI premiums are highly sensitive to the borrower's credit score, with significantly higher rates for scores below 700. FHA MIP charges the same rate regardless of credit score, making it relatively more attractive for borrowers with lower scores. PMI spread: 0.2% (760+) to 2.0+ (620-639) at 95% LTV; FHA flat 0.55% regardless of score
Upfront vs. Ongoing Costs Some mortgage insurance products require both an upfront payment at closing and ongoing monthly premiums, while others charge only one or the other. The total cost over the life of the loan depends on how long the borrower holds the mortgage and when MI can be removed. FHA: 1.75% upfront + 0.55% annual; Conventional: monthly only (or single-pay option); VA: one-time fee only

Examples

Scenario: Comparing monthly costs: conventional with PMI vs. FHA with MIP on a $300,000 purchase with 5% down
Outcome: The conventional loan has a total monthly PITIA of approximately $2,209 (P&I $1,801 + taxes $300 + insurance $125 + PMI $107 - tax escrow rounding). The FHA loan has a total monthly PITIA of approximately $2,243 (P&I $1,833 + taxes $300 + insurance $125 + MIP $131 - escrow rounding). Initially FHA is only $34/month more, but the PMI on the conventional loan can be cancelled once LTV reaches 80%, while the FHA MIP continues for the life of the loan. Over a 30-year hold, the conventional loan with PMI cancellation saves tens of thousands in total insurance costs .

Scenario: VA loan with funding fee vs. conventional with PMI for a veteran with 0% down
Outcome: The VA loan requires no down payment and no monthly insurance, resulting in a P&I payment of approximately $2,201 on the higher balance. The conventional option requires $10,500 down plus $241/month in PMI. Despite the higher VA loan balance due to the financed funding fee, the absence of monthly MI makes the VA loan approximately $100-$150/month less expensive. Additionally, the veteran avoids the $10,500 down payment requirement. The VA loan is clearly more advantageous in this scenario.

Scenario: Borrower with 620 credit score comparing FHA MIP vs. conventional PMI
Outcome: At a 620 credit score, the conventional loan carries a higher interest rate (due to LLPAs) and significantly higher PMI ($283/month vs. FHA MIP of $111/month). The FHA loan is substantially less expensive on a monthly basis despite the financed UFMIP. For this borrower, FHA is the more cost-effective choice unless the borrower expects rapid appreciation or plans to improve credit and refinance within a short timeframe.

Common Mistakes to Avoid

  • Choosing FHA for the lower monthly payment without considering life-of-loan MIP
  • Not requesting PMI cancellation when eligible
  • Assuming lender-paid PMI is free
  • Not exploring VA funding fee exemptions before closing
  • Financing the FHA UFMIP without understanding the long-term cost
  • Comparing only monthly payments without considering total insurance cost over the expected holding period

Documents You May Need

  • PMI certificate or disclosure showing coverage amount, premium rate, and payment structure (for conventional loans)
  • FHA loan estimate or closing disclosure showing UFMIP amount and annual MIP rate
  • VA Certificate of Eligibility (COE) confirming entitlement and prior usage status
  • VA disability compensation documentation (if applicable, to support funding fee exemption)
  • Lender's PMI rate quotes from multiple insurers (for comparison purposes)
  • Appraisal report (used to determine LTV for PMI pricing and future cancellation eligibility)
  • Amortization schedule showing projected LTV milestones for PMI cancellation planning
  • USDA guarantee fee disclosure (if applicable)

Frequently Asked Questions

What is the difference between PMI and MIP?
PMI (private mortgage insurance) is required on conventional loans with less than 20% down and is provided by private insurance companies. Premiums are risk-based, varying by credit score and LTV. PMI can be cancelled at 80% LTV. MIP (mortgage insurance premium) is required on all FHA loans and is paid to the FHA. MIP includes a 1.75% upfront charge plus annual premiums at flat rates regardless of credit score. MIP on most FHA purchase loans cannot be cancelled and lasts for the life of the loan.
When can I stop paying PMI?
You can request PMI cancellation from your servicer when your LTV reaches 80% based on the original property value (through principal paydown) or potentially based on a new appraisal showing sufficient appreciation. PMI automatically terminates when LTV reaches 78% on the original amortization schedule. You must be current on payments and have no subordinate liens. For cancellation based on appreciation, Fannie Mae requires at least two years of seasoning and may require the LTV to be at or below 75%.
Can FHA mortgage insurance be removed?
For FHA loans with an original LTV above 90% (the majority of FHA purchase loans with 3.5% down), the annual MIP is required for the life of the loan and cannot be removed. The only way to eliminate it is to refinance into a different loan product, such as a conventional loan, once you have sufficient equity (20%+) and a qualifying credit score. For FHA loans with an original LTV of 90% or below, MIP is removed after 11 years.
Who is exempt from the VA funding fee?
Veterans receiving VA disability compensation at any percentage, active-duty Purple Heart recipients, and surviving spouses of veterans who died in service or from a service-connected disability are exempt from the VA funding fee. This exemption is automatic when the exemption status is documented on the Certificate of Eligibility. Veterans who receive a disability rating after closing may apply for a retroactive refund of the funding fee .
Is it better to pay PMI or make a larger down payment?
This depends on the cost of PMI relative to the return on the additional down payment funds. If PMI costs 0.40% annually and the additional funds needed for 20% down could earn more than 0.40% in another investment, paying PMI may be mathematically favorable. However, eliminating PMI also reduces the monthly payment and DTI ratio, which provides cash flow and qualification benefits. A breakeven analysis comparing the cost of PMI against the opportunity cost of the additional down payment funds is the most rigorous approach.
Does the VA funding fee count toward my loan amount for qualification purposes?
When the VA funding fee is financed, it increases the total loan amount and the monthly principal and interest payment. This higher payment is used in the DTI calculation. However, VA loans do not have a strict maximum DTI; instead, they use a residual income test as the primary qualification measure. The funding fee's impact on qualification is therefore less direct than it would be under conventional or FHA DTI-driven underwriting.
Can I deduct mortgage insurance on my taxes?
The tax deductibility of mortgage insurance premiums (PMI and FHA MIP) has been available in some tax years as an itemized deduction, but this provision has been subject to periodic expiration and renewal by Congress. As of the most recent tax law, borrowers should consult a tax professional to determine whether mortgage insurance premiums are deductible in the current tax year, as the provision's status changes with legislative action .
What is lender-paid mortgage insurance and is it a good option?
Lender-paid mortgage insurance (LPMI) is an arrangement where the lender pays the PMI premium and charges the borrower a higher interest rate to compensate. The advantage is that there is no separate monthly MI payment, which can improve cash flow optics and DTI marginally. The disadvantage is that the higher interest rate is permanent; it cannot be cancelled like borrower-paid PMI once LTV reaches 80%. LPMI is generally better for borrowers who expect to sell or refinance within a few years, while borrower-paid PMI is typically better for borrowers who plan to stay in the home long enough to cancel it.
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