The full explanation
It exists because it lets the lender accept a lower down payment. On an FHA loan it is called the mortgage insurance premium (MIP) and is charged by the FHA; on a conventional loan with a small down payment it is called private mortgage insurance (PMI) and comes from a private insurer. The rules for when you can stop paying it differ in each case.
An example
Andrés's FHA payment includes the mortgage insurance premium. When he compares it with a conventional loan, he checks what PMI would cost and when he could cancel it.
With real numbers
Computed with official data for the whole U.S. In your county the numbers may differ.
- Down payment for no PMI (20%)
- $66,540
- Balance where it ends on its own (78%)
- $259,506
A conventional loan carries PMI when you put less than 20% down. On a $332,700 home, the typical U.S. value, that is $66,540. If you put less, the law requires PMI to end when your balance is scheduled to reach $259,506 (78% of the original value), as long as you are current.
Computed with: American Community Survey (ACS) 5-year estimates (2020–2024) · Fannie Mae Selling Guide B7-1-01 — Provision of Mortgage Insurance (October 17, 2026) · Homeowners Protection Act of 1998, 12 U.S.C. §4902 (October 9, 2026)
You will see it in…
- The Loan Estimate (“Mortgage Insurance” in the projected payments)
- The Closing Disclosure, under loan costs
- Your monthly loan statements
