What is private mortgage insurance (MI)?

Private MI protects a lender's investment in the event a homeowner should default on a home loan. Mortgage insurance is a financial guaranty business in which the insurer assumes a portion of a lender's risk in making a mortgage loan. Lenders and investors typically require mortgage insurance for loans with down payments of less than 20%.

Why is private MI needed?

Experience shows that homeowners with less than 20% invested in the cost of a home are more likely to default, making low-down-payment mortgages riskier for lenders and investors. To offset that risk, lenders and investors typically require mortgage insurance for loans with down payments of less than 20%.

What's the difference between private MI and FHA insurance?

Private MI is the private sector alternative to Federal Housing Administration (FHA) mortgage insurance, which is a government program backed by taxpayers. Private MI typically may be cancelled sooner than FHA and is often less expensive.

Are private mortgage insurance and mortgage life insurance the same thing?

No. Private MI is not mortgage life insurance, which pays off a mortgage if the homeowner dies or becomes disabled.

Are private MI and homeowners’ insurance the same thing?

No. Homeowners insurance protects homeowners from loss due to theft, fire or other disaster. Private MI protects the lender and investor from loss, not the borrower.

How do borrowers benefit from private MI?

Private MI makes it possible for families to buy homes with a low-down payment, helping them become homeowners sooner than otherwise possible. 

For first-time buyers, private MI helps clear the biggest hurdle to homeownership: coming up with a 20% down payment.

For trade-up buyers, private MI allows them to consider a wider range of homes and leverage their investment in their homes.

Plus, both first-time and move-up buyers can benefit by putting less money down and keeping cash for other uses: making investments, paying off debt, paying for home improvements or covering emergencies.

Are MI premiums tax-deductible?

If certain requirements were met, mortgage insurance premiums could be deducted as an itemized deduction on your tax return. This will depend on your adjusted gross income (AGI). For the most current AGI limits, consult with your CPA or tax preparer.

The deduction is not restricted to first-time home buyers.

Who orders the MI?

MI is generally ordered by the lender while the loan is being underwritten. The loan originator consults with the home buyer to determine which loan product best meets their needs, and then determines the MI requirements.

How much does private MI cost?

Premium prices vary. They are based on a variety of factors such as the size of the down payment, the borrowers' credit score, type of mortgage and amount of insurance coverage. Typically, premiums are included in the monthly mortgage payment.

Who determines the amount of MI coverage needed for the loan?

The investor typically determines the amount of MI coverage required for each specific loan product. Since Fannie Mae and Freddie Mac are the most prominent investors in the marketplace today, they set the standard minimum coverage requirements for the industry. We recommend lenders consult with their investors to determine the appropriate amount of coverage to order.

Can private MI be cancelled?

Most private MI programs allow for cancellation. However, it is not the MI company's decision whether or not to cancel coverage. As the insured, it is the decision of the lender or investor. Mortgage lenders will typically permit the cancellation of private MI when the homeowner builds up enough equity in the home. Investors establish criteria for private MI cancellation, and most will cancel private MI upon request for borrowers who have a good payment history, more than 20% - 25% equity, and have had the mortgage for at least two to three years.

Lender-paid MI may not be cancelled by the borrower since the lender pays the premium.

Under federal law, private MI on most loans made on or after July 29, 1999, will end automatically on the date the mortgage is scheduled to reach 78% of the original value of the house.

Are MI premiums refundable?

Although refundable premiums are available, generally non-refundable premium plans are selected for monthly payment policies. Mortgage insurance premiums paid in a single sum at closing or annually may be partially refundable upon cancellation, but non-refundable premiums are often selected in order to reduce closing costs.