Mortgage insurance is an insurance policy that protects a mortgage lender or title holder if the borrower defaults on payments or is otherwise unable to meet the contractual obligations of the mortgage. Typically, borrowers making a down payment of less than 20% of the home's purchase price will need to pay for mortgage insurance. Mortgage insurance is also typically required for FHA and USDA loans. It will be included in the total monthly payment, closing costs, or both if needed to pay mortgage insurance. Depending on the loan, mortgage insurance is paid for in different ways:

With a Conventional loan , the lender may arrange mortgage insurance with a private company. Private mortgage insurance (PMI) rates vary by down payment amount and credit score but are generally less expensive than FHA rates for borrowers with good credit. Most private mortgage insurance is paid monthly, with little or no initial payment required at closing. Under certain circumstances, PMI can be canceled.

With a Federal Housing Administration (FHA) loan , mortgage insurance premiums are paid to the Federal Housing Administration (FHA). FHA mortgage insurance is required for all FHA loans. It costs the same regardless of one’s credit score, with only a slight increase in price for down payments of less than five percent. FHA mortgage insurance includes both an upfront cost, paid as part of the closing costs, and a monthly cost, included in the monthly payment.

If a buyer does not have enough cash to pay the upfront fee, they can roll it into their mortgage instead of spending it out of pocket. However, this will increase their loan amount and the overall cost of their loan.

With a US Department of Agriculture (USDA) loan , the program is similar to the Federal Housing Administration, but typically less expensive. One will pay for the insurance at closing as part of their monthly payment. Like with FHA loans, a buyer can roll the upfront portion of the insurance premium into their mortgage instead of paying it out of pocket, but doing so increases both their loan amount and overall costs.

With a Department of Veterans Affairs (VA)-backed loan , the VA guarantee replaces mortgage insurance and functions similarly. With VA-backed loans intended to help service members, veterans, and their families, there is no monthly mortgage insurance premium. However, a buyer will pay an upfront funding fee. The amount of that fee varies based on:

• The type of military service

• The down payment amount

• The existence of any disability status

• Whether it is a home purchase or a home refinance

• Whether this is the buyer’s first VA loan or they have had a VA loan before

Like with FHA and USDA loans, one can roll the upfront fee into their mortgage instead of paying it out of pocket, but doing so increases both their loan amount and their overall costs.