If you are looking at buying a home without putting 20 percent down, you are going to run into a specific term pretty quickly. It sounds like something that protects you, but the reality is a little different. If you are buying a home with less than a 20 percent down payment, you may hear the term mortgage insurance.

I'm John Shea, a mortgage advisor helping homebuyers and military families navigate the homebuying process throughout Maryland. Mortgage insurance is one of those parts of the loan process that catches buyers off guard because it affects your monthly cost in ways that are not always obvious. Let me walk through what it is and why it matters.

What Mortgage Insurance Actually Is

Here is the simple version. Mortgage insurance helps protect the lender if a borrower defaults on the loan. Depending on the loan program, the cost and how long you pay it can vary. Understanding how mortgage insurance works can help you compare your financing options.

The important thing to understand is who mortgage insurance protects. It does not protect you as the buyer. It protects the lender. If you stop making payments, the mortgage insurance company reimburses the lender for their losses. You are paying for a policy that benefits someone else.

This can feel unfair at first, but there is a reason it exists. Without mortgage insurance, lenders would be much more cautious about lending to buyers with smaller down payments. The insurance is what makes low down payment loans possible for millions of buyers who could not otherwise afford to enter homeownership.

When Mortgage Insurance Is Required

The rules vary by loan type, and this is where things get interesting.

For conventional loans, mortgage insurance is typically required if your down payment is less than 20 percent. It is called private mortgage insurance, or PMI. The good news with conventional loans is that PMI drops off automatically once you have enough equity in the home, usually when your loan balance reaches 78 percent of the original home value. This gives buyers a clear path to eliminating the insurance cost over time.

For FHA loans, mortgage insurance is required regardless of your down payment amount. FHA loans have both an upfront mortgage insurance premium collected at closing and an ongoing monthly premium. In many cases, the monthly premium stays for the life of the loan. This is one of the tradeoffs of FHA financing, and it is why many buyers eventually refinance from FHA to conventional loans once their equity position improves.

For USDA loans, there is a guarantee fee that works similarly to mortgage insurance. It has an upfront and an annual portion, and it applies to the life of the loan.

For VA loans, there is no monthly mortgage insurance at all. This is one of the biggest benefits of VA financing for eligible military buyers. Instead of monthly insurance, VA loans have a one time funding fee, which is typically rolled into the loan. Over the life of the loan, the absence of monthly insurance produces real savings compared to other loan types. You can read more about the program on John's VA loan options page.

How Mortgage Insurance Affects Your Monthly Payment

When mortgage insurance applies, it adds to your monthly payment. The exact cost depends on your loan type, your loan amount, your credit score, and your down payment size.

For a rough sense of scale, PMI on a conventional loan might add around 40 to 80 dollars per month per 100,000 dollars borrowed, though the exact number varies. FHA monthly mortgage insurance premiums are often in a similar range but can be higher depending on the specifics.

Over the life of a thirty year loan, this adds up. Even at 60 dollars per month on a smaller loan, the total insurance cost over ten years can reach 7,200 dollars. Understanding this before you commit to a specific loan helps you see the full cost picture.

If you want to think through how mortgage insurance and other pieces fit into your monthly payment, John's post on structuring your VA home loan for the right monthly payment walks through how these numbers come together.

Why VA Loans Stand Out Here

For eligible military buyers, the absence of monthly mortgage insurance is one of the strongest arguments for VA financing. On the same purchase, a VA loan can produce a meaningfully lower monthly payment than an FHA or conventional loan simply because there is no ongoing insurance cost.

Combined with no down payment requirement, the VA program delivers real value. Buyers who might struggle to reach the numbers needed for other loans often find VA financing puts homeownership within reach without stretching their budget.

This is not to say VA is right for every situation. Some buyers do not qualify. Some situations favor other loan types. But when VA is an option, the monthly savings from skipping mortgage insurance are usually significant enough to make it the strongest choice.

When Mortgage Insurance Makes Sense Anyway

For buyers who are not eligible for VA financing, mortgage insurance is often the price of getting into a home sooner rather than later. Waiting to save a 20 percent down payment can take years, and during that time home prices may continue rising. Sometimes paying mortgage insurance while you build equity is a smarter path than waiting.

FHA loans in particular have made homeownership possible for many first time buyers who could not otherwise qualify. The mortgage insurance cost is real, but the flexibility and lower credit requirements can be worth it depending on the situation.

Conventional loans with PMI can also be smart. Because PMI drops off once you have enough equity, buyers who plan to stay in the home long enough to reach that point can eventually eliminate the cost entirely.

How to Get Rid of Mortgage Insurance

If you have PMI on a conventional loan, there are a few paths to removing it. The automatic termination happens when your loan balance reaches 78 percent of the original home value based on the amortization schedule.

You can also request cancellation earlier, once your loan balance reaches 80 percent of the original value. This requires a request to your lender and typically some paperwork, but it saves you the extra monthly cost sooner.

If your home appreciates significantly, you may be able to reach the 80 percent threshold based on the current value rather than the original one. This usually requires a new appraisal and a formal request. It can be worth doing if your local market has been strong.

For FHA loans, the way to eliminate mortgage insurance is usually to refinance into a conventional loan once you have enough equity. This makes sense when the savings outweigh the closing costs of refinancing, which is a calculation worth running with your lender.

A Common Mistake to Avoid

One mistake buyers make is picking a loan program based only on the interest rate without factoring in mortgage insurance. A loan with a slightly lower rate but higher mortgage insurance can actually cost more monthly than a loan with a slightly higher rate but no insurance.

For example, comparing an FHA loan to a VA loan on the same purchase, the FHA might have a slightly lower rate. But the monthly mortgage insurance premium on the FHA loan can push the total monthly payment above what the VA loan costs, even with the higher rate.

This is why looking at the full monthly payment matters more than looking at any single number in isolation. If you are weighing different financing options, John's first time homebuyer guide for Maryland walks through what to think about when comparing programs.

A Few Practical Tips

A handful of things help buyers navigate this well. First, ask your lender to show you the full monthly payment breakdown for any loan program you are considering. Principal, interest, taxes, insurance, and any mortgage insurance should all be listed clearly.

Second, understand how long you will pay the mortgage insurance. A conventional loan where PMI drops off in seven years is different from an FHA loan with insurance for the life of the loan.

Third, if you are eligible for VA financing, factor in the monthly savings from having no mortgage insurance. This alone often makes VA the strongest choice.

Fourth, if you are choosing between loan types, run the total cost comparison over several years. The right loan is the one that costs less overall for your specific situation, not just the one with the lowest rate.

A Few Final Thoughts

Mortgage insurance is one of those parts of the home buying process that can feel confusing at first but becomes clearer once you understand who it protects and how it works. For buyers with limited down payments, it is often the price of getting into a home. For military buyers with VA eligibility, it is one of the meaningful advantages of the program that you get to avoid entirely.

The buyers who make good decisions here are the ones who look at the full monthly cost, understand the tradeoffs, and choose the loan that fits their specific situation. That kind of clarity comes from a real conversation with a lender who takes the time to explain the options.

Let's Look at Your Options Together

If you are exploring different loan programs and want to understand the true cost of homeownership, my team and I are here to help. Reach out and we will walk through your situation, show you what different loan types actually cost each month, and put together a plan that fits your Maryland home purchase.