The 20% threshold is the standard, but your actual number depends on your loan type
Mortgage insurance protects the lender if you stop paying, and you pay the premium. The most common way to avoid it is to put down 20% of the home's purchase price. On a $300,000 home, that means $60,000 down. But the requirement shifts depending on the loan program: conventional loans use 20%, FHA loans require only 3.5%, VA loans require nothing down, and USDA loans also require nothing down. If you cannot reach 20% on a conventional loan, you will pay mortgage insurance until you build enough equity—usually when your loan balance drops to 80% of the home's original value.
The cost of mortgage insurance varies. On a conventional loan, it typically runs 0.5% to 1.5% of the loan amount per year, paid monthly. On an FHA loan, the upfront premium is 1.75% of the loan amount, plus an annual premium that stays for the life of the loan if you put down less than 10%. These are real dollars added to your monthly payment, so the difference between a 15% down payment and a 20% down payment can be $100 to $300 per month.
Key Takeaways
- A 20% down payment on a conventional loan eliminates the mortgage insurance requirement from the start.
- FHA loans allow you to buy with 3.5% down but require mortgage insurance for the life of the loan if you put down less than 10%.
- VA and USDA loans require zero down payment and have no mortgage insurance, though VA loans charge a funding fee and USDA loans charge a may provide fee.
- Mortgage insurance costs 0.5% to 1.5% of your loan amount annually on conventional loans, adding $100 to $300+ to your monthly payment.
- You can remove mortgage insurance from a conventional loan once your equity reaches 20%, which happens when your loan balance falls to 80% of the original purchase price.
Conventional loans and the 20% standard
Conventional loans are mortgages not backed by a federal agency. Lenders set their own rules, but the industry standard is that you need 20% down to avoid mortgage insurance. This is not a law—it is a market norm. Some lenders will go lower, but they charge higher interest rates to offset the risk, so the math often works against you.
If you put down less than 20%, the lender requires you to carry private mortgage insurance (PMI). This is an insurance policy that pays the lender if you default. You pay the premium, usually rolled into your monthly mortgage payment. The premium depends on your down payment size, credit score, and loan amount. A borrower with a 10% down payment and a 750 credit score will pay less than a borrower with a 5% down payment and a 650 score, even on the same home.
You can remove PMI once your equity reaches 20%. This happens automatically when your loan balance drops to 80% of the original purchase price—through a combination of payments and home appreciation. On a 30-year mortgage, this typically takes 8 to 12 years, though it varies by market. You can also request removal earlier if your home has appreciated significantly and you have made extra payments to build equity faster. Some lenders allow removal at 80% loan-to-value; others require 78% or lower. Check your loan documents for the exact threshold.
FHA loans: lower down payment, permanent insurance
FHA loans are backed by the Federal Housing Administration and are designed for borrowers who cannot save 20%. The minimum down payment is 3.5%, which opens homeownership to people with smaller savings. On a $300,000 home, that is $10,500 down instead of $60,000.
The trade-off is mortgage insurance that you cannot remove. FHA loans charge an upfront mortgage insurance premium (UFMIP) of 1.75% of the loan amount, added to your loan balance at closing. They also charge an annual mortgage insurance premium (MIP) that stays for the life of the loan if you put down less than 10%. If you put down 10% or more, the annual MIP drops off after 11 years. This means a borrower with 3.5% down pays insurance forever; a borrower with 10% down pays it for 11 years.
The annual MIP on an FHA loan ranges from 0.55% to 0.85% of the loan amount, depending on the loan term and down payment. Combined with the upfront premium, the total cost of FHA mortgage insurance is higher than conventional PMI over time, but the lower down payment requirement makes it accessible to more buyers. The choice between FHA and conventional depends on whether you have the cash for 10% to 20% down and whether you can may have access to for conventional rates.
VA and USDA loans: zero down, no mortgage insurance
VA loans are available to military members, veterans, and surviving spouses. They require zero down payment and have no mortgage insurance. Instead, the VA charges a one-time funding fee, typically 1.4% to 3.6% of the loan amount depending on your military branch, down payment size, and whether you have used a VA loan before. This fee is usually rolled into the loan, so you do not pay it upfront.
USDA loans are for rural homebuyers and also require zero down payment. They charge a may provide fee of 2% of the loan amount upfront and an annual fee of 0.35% of the loan balance. Like the VA funding fee, these are often rolled into the loan. USDA loans have income limits and property location restrictions, so not all borrowers or homes may have access to.
Both programs eliminate the need to save a large down payment and avoid traditional mortgage insurance. The fees are lower than FHA mortgage insurance over the life of the loan, making them valuable for borrowers who meet the requirements. If you are a veteran or buying in a rural area, these programs may offer the lowest total cost path to homeownership.
How down payment size affects your monthly payment
The relationship between down payment and monthly cost is direct. A larger down payment means a smaller loan, which means lower principal and interest payments. It also means lower or no mortgage insurance. On a $300,000 home at 7% interest over 30 years, the difference is substantial:
| Down Payment | Loan Amount | Principal + Interest | Mortgage Insurance (approx.) | Total Monthly Payment |
|---|---|---|---|---|
| 5% ($15,000) | $285,000 | $1,897 | $240 | $2,137 |
| 10% ($30,000) | $270,000 | $1,797 | $135 | $1,932 |
| 15% ($45,000) | $255,000 | $1,697 | $64 | $1,761 |
| 20% ($60,000) | $240,000 | $1,597 | $0 | $1,597 |
The jump from 5% to 20% down is $540 per month—$6,480 per year. Over 10 years, that is $64,800 in extra payments. However, this calculation assumes you keep the mortgage for the full term. If you sell or refinance within 8 to 12 years, the mortgage insurance you paid may not have been worth the cost of saving the extra down payment. The break-even point depends on your local market, interest rates, and how long you plan to stay in the home.
When to accept mortgage insurance instead of waiting
Mortgage insurance has a bad reputation, but it is not always the wrong choice. If you are renting and paying $2,000 per month, and a mortgage with insurance costs $1,800 per month, the insurance is worth it because you are building equity instead of paying rent. If you can reach 20% down in two years by saving aggressively, but home prices are rising 5% per year in your area, waiting costs you more than the insurance would.
The decision depends on three factors: how long you plan to stay, how fast prices are rising in your market, and whether you can afford the higher payment. If you are buying your first home and plan to stay 7 to 10 years, mortgage insurance for the first 8 to 12 years is often the practical choice. If you are buying in a hot market where prices rise 5% to 10% annually, waiting to save 20% down means paying more for the same home later.
Conversely, if you are buying in a stable or declining market, or if you plan to move within 5 years, waiting to avoid insurance may make sense. Run the numbers for your specific situation: compare the cost of mortgage insurance over the years you plan to stay against the cost of waiting and potentially paying more for the home.
Removing mortgage insurance from a conventional loan
Once your loan balance reaches 80% of the original purchase price, you can request PMI removal on a conventional loan. This happens automatically in some cases—your lender must remove it when you reach 78% loan-to-value if you have made all payments on time. However, automatic removal is not may provide, so contact your lender to confirm the exact threshold and timeline.
You can also request removal early if your home has appreciated. If you bought for $300,000 and it is now worth $350,000, your equity has grown even if you have not paid down the loan much. Get a professional appraisal, submit it to your lender, and request removal based on the new value. Some lenders charge for the appraisal; others cover it. The cost is usually $400 to $600, but if it removes $200+ per month in insurance, it pays for itself in two to three months.
Refinancing is another path. If interest rates drop or your credit improves, refinancing into a new loan with 20% equity can eliminate PMI. However, refinancing resets your loan term and costs money in closing fees, so run the numbers to ensure the savings justify the cost.
Frequently Asked Questions
Can I put down 15% and avoid mortgage insurance?
No. On a conventional loan, you need 20% down to avoid PMI. With 15% down, you will pay mortgage insurance until your loan balance drops to 80% of the original purchase price, which typically takes 8 to 12 years. FHA loans allow 3.5% down but charge insurance for the life of the loan if you put down less than 10%.
What if I put down 19% instead of 20%?
You will pay mortgage insurance. Lenders use 20% as the threshold; anything below it triggers PMI. The insurance stays until your equity reaches 20%, which could take a decade or more depending on your payment schedule and home appreciation.
Does mortgage insurance ever go away on an FHA loan?
Only if you put down 10% or more. If you put down 10%, the annual mortgage insurance premium drops after 11 years of payments. If you put down less than 10%, the insurance stays for the life of the loan. Refinancing into a conventional loan is the only way to remove it early.
Is it better to wait and save 20% or buy now with less down?
It depends on your market and timeline. If home prices are rising faster than you can save, buying now with insurance may cost less overall than waiting. If prices are stable or falling, waiting may be cheaper. Calculate the cost of mortgage insurance for your expected holding period and compare it to the cost of waiting and potentially paying more for the home.
Can I remove PMI if my home value increased?
Yes. If your home has appreciated, you can request PMI removal based on a new appraisal showing your equity has reached 20%. Your lender will require a professional appraisal, which costs $400 to $600. Once approved, PMI is removed immediately, saving you $100 to $300+ per month depending on your loan size.