The three mortgage insurance types
Mortgage insurance is required whenever a borrower puts less than 20% down — the lender needs protection against default losses above the equity cushion. But there are three distinct flavors of mortgage insurance, each with different cost structures, cancellation rules, and best-use cases.
PMI (Private Mortgage Insurance): Required on conventional loans with less than 20% down. Paid monthly by the borrower. Drops automatically at 78% LTV based on original value, or can be requested at 80% LTV with appraisal.
MIP (Mortgage Insurance Premium): FHA-specific. Has an upfront component (1.75% of loan at closing, usually financed) plus monthly component (0.55-0.85% annualized). Life of loan unless refinanced out.
LPMI (Lender-Paid Mortgage Insurance): Lender pays the insurance premium, and in exchange charges a slightly higher interest rate (typically 0.25% higher). No monthly premium for borrower, but the rate increase is permanent for the life of the loan.
Choosing the right one is worth $3,000-$15,000 over a typical hold period.
PMI: the default for most conventional buyers
PMI cost depends on loan-to-value and credit score:
- 95% LTV, 760+ credit: ~0.30% annualized. On $400K loan: $100/month.
- 95% LTV, 680 credit: ~0.85%. Same loan: $283/month.
- 95% LTV, 620 credit: ~1.20%. Same loan: $400/month.
Credit score is the dominant factor. The PMI penalty for a 640 score vs 760 score can double monthly premium. This makes pre-mortgage credit score improvement extremely valuable — a 40-point increase can save $10,000-$20,000 in PMI over the PMI life.
Key advantage of PMI: automatic cancellation. Federal Homeowners Protection Act requires lenders to drop PMI at 78% LTV based on original value, following the original amortization schedule. That means on a $400K purchase with 5% down, PMI drops at about year 10 through normal payments. With home appreciation, you can often request cancellation earlier (typically 80% LTV with appraisal) — for a $25-$50 fee appraisal that saves years of premiums.
FHA MIP: cheaper today, more expensive over time
FHA MIP has two components:
Upfront MIP: 1.75% of loan. On $400K FHA loan: $7,000. Typically financed into the loan (adds to your payment) rather than paid in cash.
Monthly MIP: 0.55-0.85% annualized. For LTV above 95% (common with 3.5% down): 0.85%. On $400K: $283/month. For LTV below 95%: 0.80%. For 15-year terms: different rates.
The MIP math looks comparable to PMI on day one, but the catch: monthly MIP is life of loan on post-2013 FHA originations. It doesn’t drop at 78% LTV. The only way to escape is to refinance out of FHA to conventional.
Over 15-30 years of holding, MIP costs $30,000-$80,000 more than comparable PMI because it never drops. Post-origination strategy for most FHA borrowers: refinance to conventional as soon as you have 20% equity (usually 2-5 years with appreciation).
When FHA MIP makes sense anyway: Credit score below 620 (conventional won’t approve, or would charge 1%+ PMI). First-time buyers where cash flow at purchase matters more than long-term cost. Short-term ownership plans where you’ll refinance or sell within 3-5 years before MIP compounds.
LPMI: the invisible mortgage insurance
Lender-paid mortgage insurance flips the structure. Instead of you paying monthly PMI, the lender charges a higher interest rate (typically 0.25% higher) and pays the PMI premium from their increased spread.
For a borrower, LPMI shows up as:
- No monthly PMI premium (feels cheaper on day 1)
- Higher interest rate (e.g., 7.25% instead of 7.00%)
- No automatic drop — the rate increase is permanent
Mathematically, LPMI cost over 30 years: if loan is $400K and extra rate is 0.25%, the lifetime extra interest is roughly $30,000-$40,000. If you were paying PMI that would drop off after 8 years, the lifetime PMI cost would be $8,000-$20,000. LPMI loses over 30 years.
When LPMI wins: You’ll hold the loan (without refinancing) for less than 5-7 years. The extra rate cost in the first few years is less than PMI would be. You can’t get PMI automatic cancellation because you’re selling first anyway. LPMI also simplifies the payment picture for budgeting — no “this will change when PMI drops” forecasting.
Critical LPMI warning: LPMI is irremovable except by refinancing. If rates drop later, you’d need to refinance specifically to escape the LPMI rate premium. If you can’t refinance (income drops, credit issues, rates stay high), you’re stuck.
The credit score leverage
Credit score affects all three types, but asymmetrically. FHA MIP is basically flat by credit score (small adjustments). PMI swings wildly. LPMI rate premium is moderately credit-dependent.
For a 620-680 score buyer, FHA often wins on day 1 cost because PMI at that credit band is penalized severely. For 700+ buyers, PMI wins because rates are reasonable and cancellation is available.
The break-even credit score between FHA and conventional PMI is approximately 680 (highly LTV-dependent). Below 680: FHA often cheaper. Above 680: conventional with PMI often cheaper. At 720+: conventional with PMI almost always wins.
Strategy by hold period
Under 3 years: LPMI wins — no cancellation matters, simple payments. Or FHA if conventional declines.
3-7 years: Conventional PMI wins for good credit (auto-cancellation kicks in during this window with appreciation). FHA viable but plan to refinance out.
7+ years: Conventional PMI strongly wins. PMI drops off, you’re free of insurance for remaining loan life. FHA would have kept charging MIP for the full hold.
Unknown hold: Default to conventional with PMI if credit supports it. Best balance of flexibility.
Eliminating mortgage insurance: tactics
PMI: Request cancellation at 80% LTV (may require appraisal). Force cancellation at 78% LTV per federal law. In appreciating markets, contact your servicer proactively — most won’t initiate cancellation automatically even when entitled.
MIP: Refinance to conventional once you have 20% equity (by pay-down + appreciation). Pre-2013 FHA MIP drops off at 78% LTV like PMI — only post-2013 is life-of-loan.
LPMI: Only way out is refinance. Plan from origination whether this is likely.
80/10/10 piggyback: Use a second mortgage to cover the 10-20% equity gap, avoiding PMI entirely. Popular in 2005-2007, less common now but still available. Second mortgage rates are higher (8-10%) but no PMI.
Related calculators
- PMI removal — cancellation strategy.
- FHA vs Conventional — full program comparison.
- Mortgage payment — full payment with MI.
- Refinance — escape FHA MIP.