Disclaimer: Citi may have different eligibility criteria and/or product offerings than those mentioned on mortgage.com.

Private mortgage insurance (PMI) is a monthly premium you pay to protect the lender when you put down less than 20% on a conventional loan.

The first thing you should know about mortgage insurance is that it doesn’t protect you—it’s designed to safeguard the lender from financial loss. When a lender lets you borrow more than 80% of the home’s value, they want compensation for taking on more risk in case things go south and you can’t make your payments. This rule also applies to refinancing if you have less than 20% equity in the home. Don’t confuse mortgage insurance with homeowners insurance, which has your back if your home or belongings ever get damaged.

The bright side to mortgage insurance? You won’t have to pay it forever. Generally, lenders must stop charging you for PMI once you’ve paid down your balance to 78% of the original loan amount, or when you get halfway through your loan’s term—whichever hits first.

We know mortgage insurance lingo gets confusing, so let’s untangle the PMI vs. MIP acronym web. PMI is the private mortgage insurance that comes with conventional loans when you put less than 20% down. MIP is the mortgage insurance premium (hence the acronym) that kicks in when you have a Federal Housing Administration (FHA) loan. Both of these protect your lender just in case you default on your loan, but they operate a bit differently. More on MIP and FHA loans later.

PMI for conventional mortgages

So how much is mortgage insurance? It depends. PMI isn’t a flat fee—it’s usually 0.5% to 1.5% of the amount you borrow each year. Most of the time, mortgage insurance is part of your monthly bill, with little to no required payment at closing.

Your financial status may influence how much a lender decides to charge you for PMI: the riskier your profile, the higher percentage you’ll likely have to pay. Let’s walk through all the factors that will impact your PMI costs:

• Down payment: Even if you can’t afford 20%, a higher down payment can shave down your PMI costs.
• Credit score: A higher credit score shows you’re good at managing debts, which can get you a lower PMI rate.
• Mortgage amount: Larger loans are saddled with higher PMI costs since the lender is taking on more risk.
• Mortgage type: Adjustable-rate loans are riskier than fixed-rate loans, so they come with higher PMI costs.

Every decimal counts

While it may not look like much, shaving even a few decimal points off your PMI rate can save you thousands of dollars over the life of your loan.

PMI in action

We’ll be your mortgage insurance calculator for a moment. Say you buy a $300,000 home with 10% down. That would leave you with a $270,000 conventional loan balance. If the lender decides to charge you a 1.0% PMI rate, you will owe $2,700 a year or $225 on top of your monthly mortgage payment.

If you have a higher credit score with the same loan, the lender might grant you a lower PMI rate of 0.5%. In that case, you would owe $1,350 a year or $112.50 each month. Pretty significant difference, right?

FHA mortgage insurance premiums

If you’re looking for more lenient credit requirements and a down payment as low as 3.5%, a Federal Housing Administration (FHA) loan might be a smart alternative to a conventional loan.

Instead of private mortgage insurance, you would have to pay that mortgage insurance premium (MIP) we mentioned. A mortgage insurance premium comes as two payments: an upfront premium plus an annual payment.

The upfront premium is a one-time payment of 1.75% of your total loan. Usually this is paid upfront, but it can also be tacked onto your loan balance.

Your annual MIP will be 0.45% to 1.05% of your loan balance, divvied up over your monthly payments. If your down payment is less than 10%, you’ll be stuck with the annual premium for the entire loan term.

Heads up: You usually can’t cancel MIP unless you refinance to a different type of loan.

Some government-backed loans pack two punches: no mortgage insurance and no down payment required. If you qualify for a USDA loan or a VA loan, you can grab hold of these great benefits, but you can’t escape a fee.

USDA guarantee fee

If you’re hoping to cozy up in the countryside, a loan from the U.S. Department of Agriculture (USDA) could be your zero down payment alternative to a conventional loan. You won’t pay mortgage insurance if the property is in an eligible USDA area, but you will owe an upfront guarantee fee and an annual fee.

These fees may ebb and flow on a yearly basis, but the law sets firm limits: the upfront fee can only be as high as 3.5% of the loan amount and the annual charge can reach up to 0.5% of the annual unpaid principal balance.

These fees essentially work as mortgage insurance for USDA loans, protecting lenders from default and keeping the program in action.

VA funding fee

If you’re a veteran, an active service member or a surviving spouse, a Veterans Affairs (VA) loan might be your best bet for dodging mortgage insurance with no down payment. Instead of PMI, you’ll be up against a funding fee, which is a small percentage of the total loan amount.

This one-time fee goes to the Department of Veterans Affairs to keep the program running smoothly and protect lenders against default. You can typically expect to pay 1.25% to 3.3% of the loan amount. Even though a down payment isn’t required, you may want to bring some cash to the table: the higher your down payment, the lower your funding fee will be.

Want to avoid mortgage insurance altogether? Here’s how to make it happen.

Make a large down payment: We might sound like a broken record here, but putting down 20% is a surefire way to keep mortgage insurance at bay. Saving up 20% is no easy feat, so it’s important to weigh the pros and cons: do you want to get into a home now and start building equity, or would you rather keep saving to avoid the cost of mortgage insurance? If home prices are surging, mortgage insurance might be cheaper than waiting to buy.

Get a 80/10/10 piggyback loan: A piggyback loan can help you avoid mortgage insurance if you have a 10% down payment. Also known as an 80/10/10, this involves two loans: one covering 80% of the home’s price and the other covering 10%. Proceed with caution here, as juggling two loans can end up costing more than PMI in interest and closing costs.

Avoid conventional loans: We’ve already gotten you up to speed on USDA and VA loans. Do your research and see if you qualify for one of these government-backed loans so you can avoid paying PMI.

The best thing about mortgage insurance is the day it goes away, right? Let’s take a look at several ways you can wave PMI goodbye.

• Wait for automatic cancellation: On most loan types, your lender is required to cancel PMI once you reach 22% equity in the home, or one month after your loan’s midpoint (say 15 years into a 30-year loan). This doesn’t require action on your part, but there are more proactive ways to save. Note that this doesn’t apply to the mortgage insurance premium on FHA loans.
• Ask for cancellation: Mark your calendar for the day you hit 20% equity in your home. That’s when you can write to your lender or loan servicer and request that mortgage insurance be taken off the bill.
• Keep track of market value: If your home has appreciated in value due to market conditions or big renovations, you might have built up more equity than you think. You can ask your lender for a new appraisal of your home’s worth for a few hundred bucks. They’ll compare your remaining loan balance to the home’s appraised value to determine how much equity you have. Depending on how long you’ve been in the home, you may need to have up to 25% equity to cancel PMI.