Mortgage Insurance (MI), also called Private Mortgage Insurance (PMI) or Mortgage Insurance Premium (MIP), is a monthly premium/fee added to a buyer’s mortgage pmt if they’re putting less than 20% down. It’s purpose is to protect lenders from excess risk while still allowing consumers to put less down. MI is expressed as a “factor” (e.g. 1.05%) and is a function of your FICO, loan amount, and how far away you are from 20% down. MI applied to normal loans can be removed at 80% LTV and is legally required to terminate at <= 78% LTV.

MI is designed to collect funds directly from “higher risk” buyers and pool those funds together to serve as an insurance in case a subset of borrowers defaulted on their loans.

You’ll recall the fundamental forces of investment decisions are Risk & Return. Higher risk demands higher return, and it’s a statistical fact those who put less than 20% down have a higher risk of defaulting on their loans.

Normally, the higher return would be reflected in the interest rate (or simple rejection of the application), but very few people have the means to afford said rate or amass 20% to go around it. As it has been for 25yrs now, mortgage insurance gives the average consumer a chance at homeownership by focusing that risk into a separate mthly pmt. That payment automatically falls off once the ratio of a person’s loan balance to their property value is less than 79%.

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Contrary to consumer belief, today’s mortgage insurance gives the average consumer a chance at homeownership. Without it, we’d be boxed out/rejected from or crushed by prohibitively expensive interest rates. By focusing that risk into a separate mthly pmt and legally requiring that payment to fall off once a homeowner is no longer in the >80% LTV bucket, lenders are protected enough to offer affordable rates AND consumers are able to get into homes with clothes and furniture to furnish it.

For example, my wife & I put 5% down on a $400,000 home in 2021. Our mortgage insurance was an additional $147/mo on top of our PITI and I had it removed just a few months ago. Our MI Factor of 0.465 was determined based on our FICO and our 5% down decision. The MI Factor works very similarly to discount points in that multiplying the value (0.465%) by the loan amt ($380,000) gives us the annual MI owed. Divide by 12 and you get our $147/mo.

*Notable points:

• MI Factors are most commonly between 0.5% and 1.5% of the loan amount. Remember that’s annual.
• FHA loans do NOT work the same way. FHA’s version of MI, which they call Mortgage Insurance Premium (MIP), requires a minimum 10yrs of paying their MI.